Jun 152018
 June 15, 2018  Posted by at 8:10 am Finance Tagged with: , , , , , , , , , , , , ,  4 Responses »

OR LIGHT Compassion 2018


Argentina’s Peso Collapses Even Further Despite $50 Billion IMF Bailout (WS)
ECB Calls Halt To Quantitative Easing, Despite ‘Soft’ Euro (G.)
Japan’s Central Bank Dials Down Inflation View, Complicates Stimulus-Exit (R.)
Powell Orchestrates a Masterful Move (DDMB)
The Fed Creates Problems For Itself (Macleod)
The Art of the Deal Worked On Sentosa Island (AT)
Absence of “CVID” In Joint Statement? (Hani)
Optimism (Caitlin Johnstone)
Blackstone Becomes Biggest Hotel & Property Owner in Spain (WS)
‘Tourism Pollution’: Japanese Crackdown Costs Airbnb $10 Million (G.)
Greeks Are Least Satisfied In The EU (K.)
Turkey: Even Birds Need Our Consent To Fly In The Aegean (K.)
Comey et al Just Made It More Difficult For Mueller To Prosecute Trump (Hill)
A Closer Look At Extreme FBI Bias Revealed In OIG Report (ZH)



Money has left the building.

Argentina’s Peso Collapses Even Further Despite $50 Billion IMF Bailout (WS)

Today the Argentina peso plunged another 5.5% against the US dollar. It now takes ARS 27.7 to buy $1. Over the past 16 years, the peso has gone through waves of collapses. This collapse began on April 20. The central bank of Argentina (BCRA) countered it by selling $1 billion per day of scarce foreign exchange reserves and buying pesos. The peso fell more quickly. The BCRA responded with three rate hikes, to finally 40%! On May 8, the government asked the IMF for a bailout. On May 16, after a chaotic plunge of the peso, the BCRA was able to refinance about $26 billion in maturing peso-denominated short-term debt (Lebacs) at an annual interest of 40%, and the peso bounced. It was a dead-cat bounce, however, and the peso plunged another 13% against the dollar through today.

Since April 20, the peso has plunged 27.5%. The annotated chart shows the daily moves of the collapse, and the various failed gyrations to halt it (the chart depicts the value of 1 ARS in USD). The collapse of the peso comes despite an endless series of measures to halt it. Just this week so far: On Tuesday, the BCRA decided to keep its key interest rate at 40%; and on Wednesday, the Ministry of Finance announced it would hold daily auctions to sell $7.5 billion in foreign exchange reserves and buy pesos, to prop up the peso. But it was apparently the only one buying pesos. With inflation at 25.5% and heading to 27% by year-end, according to government estimates, with a rising budget deficit, a surging current account deficit, soaring borrowing costs, and burned investors, what else is there to do?

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Not Draghi’s finest hour.

ECB Calls Halt To Quantitative Easing, Despite ‘Soft’ Euro (G.)

The European Central Bank has shrugged off evidence of a slowdown in the eurozone and announced that it will phase out the stimulus provided by its massive three-year bond-buying programme to the eurozone economy by the end of the year. Despite warning that the single currency area was going through a soft patch at a time when protectionist risks were rising, the ECB said it would wind down its bond purchases over the next six months. The ECB is currently boosting the eurozone money supply by buying €30bn of assets each month, but this will be reduced to €15bn a month after September and ended completely at the end of 2018.

The move follows strong pressure from some eurozone countries, led by Germany, that were uncomfortable about the more than €2.4tn of assets accumulated by the ECB since it launched its quantitative easing programme at the start of 2015. Mario Draghi, the ECB’s president, said at the end of a meeting of the bank’s governing council in Latvia that the QE programme had succeeded in its aim of putting inflation on course to meet its target of being below but close to 2%. Eurozone activity has accelerated markedly over the past three years, with some estimates suggesting that QE contributed 0.75percentage points a year to the average 2.25% annual growth rate.

The ECB’s statement reflected the battle between hawks and doves on the bank’s council, with the decision on QE matched by a softening of its approach to interest rates. Draghi said there would be no prospect of an increase in the ECB’s key lending rate – currently 0.0% – until next summer at the earliest. “We decided to keep the key ECB interest rates unchanged and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path,” Draghi said.

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No, really, Abenomics is dead.

Japan’s Central Bank Dials Down Inflation View, Complicates Stimulus-Exit (R.)

The Bank of Japan maintained its ultra-loose monetary policy on Friday and downgraded its view on inflation in a fresh blow to its long-held 2% price goal, further complicating the central bank’s path to rolling back its crisis-era stimulus. Markets are on the lookout for clues from BOJ Governor Haruhiko Kuroda’s post-meeting briefing on how long the central bank could hold off on whittling down stimulus given recent disappointingly weak price growth. As widely expected, the Bank of Japan kept its short-term interest rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero%.

The move contrasts with the European Central Bank’s decision to end its asset-purchase program this year and the U.S. Federal Reserve’s steady rate increases, which signaled a break from policies deployed to battle the 2007-2009 financial crisis. “Consumer price growth is in a range of 0.5 to 1%,” the BOJ said in a statement accompanying the decision. That was a slightly bleaker view than in the previous meeting in April, when the bank said inflation was moving around 1%. The BOJ stuck to its view the economy was expanding moderately, unfazed by a first-quarter contraction that many analysts blame on temporary factors like bad weather.

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He just likes the attention.

Powell Orchestrates a Masterful Move (DDMB)

Federal Reserve Chairman Jerome Powell has taken the first steps in remaking the central bank in his “plain-English” image, which can only be a good thing for financial markets. Earlier this week, news leaked that the central bank was considering holding a press conference following each Federal Open Market Committee meeting instead of after every other one like it does now. The reports set off a mini-storm. Speculation rose the Fed would implement this new policy immediately, which could mean the central bank was considering accelerating the pace of interest-rate increases as soon as August. After all, investors had become accustomed to the Fed only making a major policy move at meetings followed by a press conference. Now, every meeting would be “live.”

But in a masterful move, Chairman Jerome Powell managed to confirm the policy while also putting financial markets at ease. Rather than announcing the change in the official statement outlining the Fed’s plan to raise its target for the federal funds rate for the seventh time since December 2015, Powell waited until the start of his press conference to drop the bomb, noting that the policy wouldn’t start until January. Here’s Powell’s reasoning: “My colleagues and I meet eight times a year and take a fresh look each time at what is happening in the economy and consider whether our policy needs adjusting. We don’t put our interest rate decisions on auto-pilot because the economy can always evolve in unexpected ways.

History has shown that moving interest rates either too quickly or too slowly can lead to bad economic outcomes. We think the outcomes are likely to be better overall if we are as clear as possible about what we are likely to do and why. To that end, we try to give a sense of our expectations for how the economy will evolve and how our policy stance may change. As Chairman, I hope to foster a public conversation about what the Fed is doing to support a strong and resilient economy. And one practical step in doing so is to have a press conference like this after every one of our scheduled FOMC meetings. We’re going to do that beginning in January. That will give us more opportunities to explain our actions and to answer your questions.

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“..the unsustainable excesses of unprofitable debt created by suppressing interest rates..”

The Fed Creates Problems For Itself (Macleod)

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates. Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis.

The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis. Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019. The chart tells us the Fed is already living dangerously with yesterday’s hike, and further rises will all but guarantee a credit crisis.

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The view from Asia Times. Many people in that part of the world don’t understand the criticism.

The Art of the Deal Worked On Sentosa Island (AT)

Some statesmen by their sheer force of personality and unorthodox ways of politicking arouse disdain among onlookers. US President Donald is perhaps the most famous figure of that kind in world politics today. No matter what he does, Trump attracts criticism. He evokes strong feelings of antipathy among a large and voluble swathe of opinion within half of America. The making of history in a virtual solo act on his part, which is the rarest of efforts, on Sentosa Island in Singapore on Tuesday and which the world watched with awe and disbelief, will be instinctively stonewalled. Half of America simply refuses to accept the positive tidings about him coming from Singapore.

The skeptics are all over social media pouring scorn, voicing skepticism, unable to accept that if the man has done something sensible and good for his country and for world peace, it deserves at the very least patient, courteous attention. The problem is about Trump – not so much the imperative need of North Korea’s denuclearization. But western detractors – ostensibly rooting for the “liberal international order” – will eventually lapse into silence because what emerges is that North Korean leader Kim Jong-un has enough to “bite” here in the deal that Trump is offering – broadly, a security guarantee from the US and the offer of a full-bodied relationship with an incremental end to sanctions plus a peace treaty.

Succinctly put, Trump has offered a deal that Kim simply cannot afford to reject. The ending of the US-ROK military exercises forthwith; Trump’s agenda of eventual withdrawal of troops from ROK; the lure of possible withdrawal of sanctions once 20% of the denuclearization process gets underway, or once the process becomes irreversible; Trump’s hint that he has sought assurances from Japan and the ROK that they will be “generous” in offering economic assistance to the reconstruction of North Korea; China’s involvement in the crucial process – these are tangibles.

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The view from South Korea.

Absence of “CVID” In Joint Statement? (Hani)

The absence of any reference to “complete, verifiable, and irreversible dismantlement” (CVID) of North Korea’s nuclear program in the joint statement reached at US President Donald Trump and North Korean leader Kim Jong-un’s June 12 summit in Singapore is being seen by some as a “negotiation failure” on the US’s part. But an analysis of Trump’s subsequent remarks – and a reading between the lines of the Pyongyang’s official announcement – suggests the US achieved practical gains in terms of a commitment from the North in exchange for the face-saving measure of avoiding use of the “CVID” term due to possible North Korean objections to it.

To begin with, the Singapore joint statement’s language marks a step forward from the Panmunjeom Declaration of Apr. 27 in terms of the final goal of denuclearizing the Korean Peninsula. The latest statement refers to Kim having “reaffirmed his firm and unwavering commitment to complete denuclearization of the Korean Peninsula.” While the Panmunjeom Declaration referred to “realizing, through complete denuclearization, a nuclear-free Korean Peninsula,” the new statement includes the additional reference to a “firm and unwavering commitment.”

From the reference to Kim’s “firm and unwavering” commitment to denuclearization, some experts are suggesting North Korea may have agreed to verification in addition to denuclearization – in other words, that the language may be a substitute for the “verifiable” part of the CVID approach demanded by Washington. “You could see them as having used the term out of awareness of North Korea’s discomfort with the word ‘verification,’” Handong Global University professor Kim Joon-hyung said after a Korea Press Foundation debate at Singapore’s Swissotel on June 13. “It may be fair to say North Korea made a definite commitment on the implementation and verification issues,” Kim argued.

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“..while you can always count on Capitol Hill to make it incredibly easy for a president to deploy military personnel around the globe, giving that same office the power to bring troops home is a completely different matter. ”

Optimism (Caitlin Johnstone)

Off the top of my head I have a hard time thinking of anything sleazier than smearing peace talks in order to gain partisan political points, but that has indeed been the theme of the last few days when it comes to the Singapore summit. Liberal pundits everywhere have been busily circulating the narrative that Kim Jong-Un “played” Trump by getting him to temporarily halt military drills in exchange for suspended nuclear testing. It was the most fundamental beginning of peace negotiations and a slight deescalation in tensions on the Korean Peninsula, but the way they talk about it you’d think Kim had taken off from Singapore in Air Force One with the keys to Fort Knox and Melania on his lap.

I’m not sure how far up the military-industrial complex’s ass one’s head needs to be to think that one single step toward peace is a gigantic take-all-the-chips win for the impoverished North Korea, but many of Trump’s political enemies are taking it even further. Senate Democrats have introduced a bill to make it more difficult for Trump to withdraw US troops from South Korea, because while you can always count on Capitol Hill to make it incredibly easy for a president to deploy military personnel around the globe, giving that same office the power to bring troops home is a completely different matter.

Surprising no one, MSNBC’s cartoon children’s program The Rachel Maddow Show took home the trophy for jaw-dropping, shark-jumping ridiculousness with an eighteen-minute Alex Jones impression claiming that the chief architect of the Korean negotiations was none other than (and if you can’t guess whose name I’m going to write once we get out of these parentheses I deeply envy your ignorance on this matter) Vladimir Putin. [..] This president is facilitating acts of military violence and dangerous escalations around the world; anyone who isn’t relieved by the possibility of one powder keg being defused in that rampage actually has a lot more faith in Trump’s competence than they’re pretending to.

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Easy pickings.

Blackstone Becomes Biggest Hotel & Property Owner in Spain (WS)

Private equity firm Blackstone, the undisputed king of property funds, continues to bet big on global real estate. In the last week it raised $9.4 billion for Asian real estate. It was also given the green light to acquire Spain’s biggest real estate investment fund (REIT), Hispania, for €1.9 billion. The move, after its prior acquisitions, will cement its position as Spain’s biggest hotel owner and fully private landlord. Hispania’s 46 hotels, added to Blackstone’s other hotels, will turn the PE firm into Spain’s largest hotelier with almost 17,000 rooms, far ahead of Meliá (almost 11,000), H10 (more than 10,000) and Hoteles Globales (just over 9,000).

It took Blackstone just three moves to become market leader. First, it acquired the hotel group HI Partners from struggling Spanish lender Banco Sabadell for €630 million in October 2017. Then, a month ago, it bought 29.5% of the hotel chain NH Hoteles, which is currently in the hands of the Chinese conglomerate HNA. Now, by raising its stake in Hispania from 16.75% to 100%, it will take up a dominant position in one of the world’s biggest tourist markets. With this deal, it will also expand its residential property empire in Spain. Blackstone has over 100,000 real estate assets controlled via dozens of companies. Those assets include a huge portfolio of impaired real estate assets, including defaulted mortgages and real estate-owned assets (REOs).

Blackstone also owns 1,800 social housing units, which it acquired from Madrid City Hall in a controversial deal brokered by the son of former Spanish prime minister José María Aznar and former Madrid mayor Ana Botella. Blackstone paid €202 million for the apartments in 2013; they are now estimated to be worth €660 million — a 227% return in just five year! Since its purchase of the properties, Blackstone has hiked rents on the flats by 49%. Those who can’t pay have been evicted. Blackstone also played a starring role in one of the world’s biggest real estate operations of 2017, in which it payed €5.1 billion for the defaulted loans Banco Santander inherited from its shotgun-acquisition of Banco Popular.

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“..a dramatic drop in the number of Japanese properties available via Airbnb, from more than 60,000 this spring to just 1,000 on the eve of the law’s introduction.”

‘Tourism Pollution’: Japanese Crackdown Costs Airbnb $10 Million (G.)

It has become a familiar scene: tourists in rented kimonos posing for photographs in front of a Shinto shrine in Kyoto. They and other visitors have brought valuable tourist dollars to the city and other locations across Japan. But now the country’s former capital is on the frontline of a battle against “tourism pollution” that has already turned locals against visitors in cities across the world such as Venice, Barcelona and Amsterdam. The increasingly fraught relationship between tourists and their Japanese hosts has spread to the short-stay rental market. On Friday a new law comes into effect that requires property owners to register with the government before they can legally make their homes available through Airbnb and other websites.

The restriction has caused the number of available properties to plummet and has cost the US-based company millions of dollars. Thanks to government campaigns, the number of foreign tourists visiting Japan has soared since the end of a flat period caused by a strong yen and radiation fears in the aftermath of the 2011 Fukushima disaster. A record 28.7 million people visited last year, an increase of 250% since 2012. Almost seven million were from China, with visitors from South Korea, Taiwan, Hong Kong Thailand and the US taking the next five spots. By 2020, the year Tokyo hosts the Olympic Games, the government hopes the number will have risen to 40 million.

[..] Under the new private lodging law, which was supposed to address a legal grey area surrounding short-term rentals – known as minpaku – properties can be rented out for a maximum of 180 days a year, and local authorities are permitted to impose additional restrictions. The result has been a dramatic drop in the number of Japanese properties available via Airbnb, from more than 60,000 this spring to just 1,000 on the eve of the law’s introduction. The legislation has forced the firm to cancel reservations for guests planning to stay in unregistered homes after Friday and to compensate clients to the tune of about $10m.

A sign in Kyoto cautions against touching geishas, taking selfies, littering, sitting on fences and eating and smoking on the street. Photograph: Justin McCurry for the Guardian

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Greeks Are Least Satisfied In The EU (K.)

Greece is the least satisfied nation in the European Union, according to a Eurobarometer survey published Thursday. More specifically, the survey, conducted between March 17 and 28, showed that just 52% of Greeks said they were satisfied with their lives, compared to a 83% average for the 28-member bloc. Only 35% of Greeks surveyed said they were satisfied with the financial situation of their households, compared to 71% across the EU. A staggering 98% said the state of the country’s economy is bad while one in two Greeks said the country’s financial crisis is not over yet and that it will deteriorate even further. As for the country’s general situation, 94% said it is negative. Just 6% said the general situation was positive compared to the 51% average for EU member-states.

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Even turkeys?!

Turkey: Even Birds Need Our Consent To Fly In The Aegean (K.)

With Greece featuring prominently in Turkey’s election campaigning, Turkish Foreign Minister Mevlut Cavusoglu raised the tension a notch again Thursday, warning that not even a bird will fly over the Aegean without Ankara’s permission. Responding to criticism by Turkish ultra-nationalists that 18 islands have been “lost” to Greece in recent years, Cavusoglu said that since the crisis over the Imia islets in 1996 there have been no changes in the legal status of the Aegean. “Not only during our own rule, but before that there has been no change in the status of the Aegean. We will not allow this. Even in the case of research we will not give permission, not even to a bird in the Aegean,” he said during an interview with a Turkish radio station.

He went on to say that Turkey will make no concessions in the Aegean and Cyprus, and that Ankara will also begin gas exploration “around” the Eastern Mediterranean island. “We also have a drill,” he said. Turkey has vowed to stop Cyprus from drilling for gas and oil in its exclusive economic zone (EEZ), insisting there can be no development of the island’s natural resources without the participation of the Turkish Cypriots in the island’s Turkish-occupied north. “In the last few months we have prevented drilling and we drove the Italians away. We will not allow anyone to take away the rights of Turkish Cypriots,” he said. Cyprus government spokesman Prodromos Prodromou said that Nicosia will not be dragged into the “climate of tension” that Turkey is cultivating. He cited international law and said that Cyprus has an established EEZ. Moreover, he said the US, Russia and the European Union have all backed Cyprus’s rights.

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Wonder what the fallout will be.

Comey et al Just Made It More Difficult For Mueller To Prosecute Trump (Hill)

James Comey once described his position in the Clinton investigation as being the victim of a “500-year flood.” The point of the analogy was that he was unwittingly carried away by events rather than directly causing much of the damage to the FBI. His “500-year flood” just collided with the 500-page report of the Justice Department inspector general (IG) Michael Horowitz. The IG sinks Comey’s narrative with a finding that he “deviated” from Justice Department rules and acted in open insubordination. Rather than portraying Comey as carried away by his biblical flood, the report finds that he was the destructive force behind the controversy. The import of the report can be summed up in Comeyesque terms as the distinction between flotsam and jetsam.

Comey portrayed the broken rules as mere flotsam, or debris that floats away after a shipwreck. The IG report suggests that this was really a case of jetsam, or rules intentionally tossed over the side by Comey to lighten his load. Comey’s jetsam included rules protecting the integrity and professionalism of his agency, as represented by his public comments on the Clinton investigation. The IG report concludes, “While we did not find that these decisions were the result of political bias on Comey’s part, we nevertheless concluded that by departing so clearly and dramatically from FBI and department norms, the decisions negatively impacted the perception of the FBI and the department as fair administrators of justice.”

The report will leave many unsatisfied and undeterred. Comey went from a persona non grata to a patron saint for many Clinton supporters. Comey, who has made millions of dollars with a tell-all book portraying himself as the paragon of “ethical leadership,” continues to maintain that he would take precisely the same actions again. Ironically, Comey, fired FBI deputy director Andrew McCabe, former FBI agent Peter Strzok and others, by their actions, just made it more difficult for special counsel Robert Mueller to prosecute Trump for obstruction. There is now a comprehensive conclusion by career investigators that Comey violated core agency rules and undermined the integrity of the FBI. In other words, there was ample reason to fire James Comey.

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Many heads will roll at the Bureau.

A Closer Look At Extreme FBI Bias Revealed In OIG Report (ZH)

As we digest and unpack the DOJ Inspector General’s 500-page report on the FBI’s conduct during the Hillary Clinton email investigation “matter,” damning quotes from the OIG’s findings have begun to circulate, leaving many to wonder exactly how Inspector General Michael Horowitz was able to conclude: “We did not find documentary or testimonial evidence that improper considerations, including political bias, directly affected the specific investigative actions we reviewed” We’re sorry, that just doesn’t comport with reality whatsoever. And it really feels like the OIG report may have had a different conclusion at some point.

Just read IG Horowitz’s own assessment that “These texts are “Indicative of a biased state of mind but even more seriously, implies a willingness to take official action to impact the Presidential candidate’s electoral prospects.” Of course, today’s crown jewel is a previously undisclosed exchange between Peter Strzok and Lisa Page in which Page asks “(Trump’s) not ever going to become president, right? Right?!” to which Strzok replies “No. No he’s not. We’ll stop it.” Nevermind the fact that the FBI Director, who used personal emails for work purposes, tasked Strzok, who used personal emails for work purposes, to investigate Hillary Clinton’s use of personal emails for work purposes. Of course, we know it goes far deeper than that…

The Wall Street Journal’s Kimberley Strassel also had plenty to say in a Twitter thread:
1) Don’t believe anyone who claims Horowitz didn’t find bias. He very carefully says that he found no “documentary” evidence that bias produced “specific investigatory decisions.” That’s different
2) It means he didn’t catch anyone doing anything so dumb as writing down that they took a specific step to aid a candidate. You know, like: “Let’s give out this Combetta immunity deal so nothing comes out that will derail Hillary for President.”
3) But he in fact finds bias everywhere. The examples are shocking and concerning, and he devotes entire sections to them. And he very specifically says in the summary that they “cast a cloud” on the entire “investigation’s credibility.” That’s pretty damning.
4) Meanwhile this same cast of characters who the IG has now found to have made a hash of the Clinton investigation and who demonstrate such bias, seamlessly moved to the Trump investigation. And we’re supposed to think they got that one right?
5) Also don’t believe anyone who says this is just about Comey and his instances of insubordination. (Though they are bad enough.) This is an indictment broadly of an FBI culture that believes itself above the rules it imposes on others.
6) People failing to adhere to their recusals (Kadzik/McCabe). Lynch hanging with Bill. Staff helping Comey conceal details of presser from DOJ bosses. Use of personal email and laptops. Leaks. Accepting gifts from media. Agent affairs/relationships.
7)It also contains stunning examples of incompetence. Comey explains that he wasn’t aware the Weiner laptop was big deal because he didn’t know Weiner was married to Abedin? Then they sit on it a month, either cuz it fell through cracks (wow) or were more obsessed w/Trump
8) And I can still hear the echo of the howls from when Trump fired Comey. Still waiting to hear the apologies now that this report has backstopped the Rosenstein memo and the obvious grounds for dismissal.

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Apr 172018
 April 17, 2018  Posted by at 8:44 am Finance Tagged with: , , , , , , , , , , ,  5 Responses »

DPC Times Square, New York Times building under construction 1903


How Libor’s Surge Will Help Pop The Global Bubble (Colombo)
America First – R.I.P. (David Stockman)
Optimism of US Manufacturers “Plunged” the Most Ever (WS)
US Planning To Open “Third Front” In China Trade Spat (ZH)
US Cuts Off China’s ZTE From American Tech for Seven Years (BBG)
China Industrial Output, Investment Growth Miss Expectations (R.)
Is Tesla The Next Enron? (MW)
Tesla Puts the Brakes on Model 3 Production Line (BBG)
Facebook’s Next Big Headache: Europe (Axios)
Facebook Hit With Class Action Suit Over Facial Recognition Tool (AFP)
US Freight Expenditures Surge 15.6% from Year Ago (WS)
US and UK Blame Russia For ‘Malicious’ Cyber-Offensive (G.)
One In Three UK Millennials Will Never Own A Home (G.)
Scientists Accidentally Create Mutant Enzyme That Eats Plastic Bottles (G.)
More Than 95% Of World’s Population Breathe Dangerous Air (G.)



Debt has grown everywhere. Ever less is needed to make it pop.

How Libor’s Surge Will Help Pop The Global Bubble (Colombo)

As the world’s most important benchmark interest rate, approximately $10 trillion worth of loans and $350 trillion worth of derivatives use the Libor as a reference rate. Libor-based corporate loans are very prevalent in emerging economies, which is helping to inflate the emerging markets bubble that I am warning about. In Asia, for example, Libor is used as the reference rate for nearly two-thirds of all large-scale corporate borrowings. Considering this fact, it is no surprise that credit and asset bubbles are ballooning throughout Asia, as my report on Southeast Asia’s bubble has shown.

Like other benchmark interest rates, when the Libor is low, it means that loans are inexpensive, and vice versa. As with the U.S. Fed Funds Rate, Libor rates were cut to record low levels during the 2008-2009 financial crisis in order to encourage more borrowing and concomitant economic growth. Unfortunately, economic booms that are created via central bank manipulation of borrowing costs are typically temporary bubble booms rather than sustainable, organic economic booms. When central banks raise borrowing costs as an economic cycle matures, the growth-driving bubbles pop, leading to a bear market, financial crisis, and recession.

Similar to the U.S. Fed Funds Rate, the Libor has been rising for the last several years as central banks raise interest rates. While rising interest rates haven’t popped the major global bubbles just yet, it’s just a matter of time before they start to bite.

While most economists and financial journalists view the rising Libor as part of a normal business cycle, I’m quite alarmed due to my awareness of just how much our global economic recovery and boom is predicated on ultra-low interest rates. With global debt up 42% or over $70 trillion since the Global Financial Crisis, interest rates do not need to rise nearly as high as they were in 2007 and 2008 to cause a massive crisis.

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What could have been. Excellent piece.

America First – R.I.P. (David Stockman)

When the Cold War officially ended in 1991, Washington could have pivoted back to the pre-1914 status quo ante. That is, to a national security policy of America First because there was literally no significant military threat left on the planet. Post-Soviet Russia was an economic basket case that couldn’t even meet its military payroll and was melting down and selling the Red Army’s tanks and artillery for scrap. China was just emerging from the Great Helmsman’s economic, political and cultural depredations and had embraced Deng Xiaoping proclamation that “to get rich is glorious”. The implications of the Red Army’s fiscal demise and China’s electing the path of export mercantilism and Red Capitalism were profound.

Russia couldn’t invade the American homeland in a million years and China chose the route of flooding America with shoes, sheets, shirts, toys and electronics. So doing, it made the rule of the communist elites in Beijing dependent upon keeping the custom of 4,000 Wal-Marts in America, not bombing them out of existence. In a word, god’s original gift to America—the great moats of the Atlantic and Pacific oceans—had again become the essence of its national security. After 1991, therefore, there was no nation on the planet that had the remotest capability to mount a conventional military assault on the U.S. homeland; or that would not have bankrupted itself attempting to create the requisite air and sea-based power projection capabilities—a resource drain that would be vastly larger than even the $700 billion the US currently spends on its global armada.

Indeed, in the post-cold war world the only thing the US needed was a modest conventional capacity to defend the shorelines and airspace against any possible rogue assault and a reliable nuclear deterrent against any state foolish enough to attempt nuclear blackmail. Needless to say, those capacities had already been bought and paid for during the cold war. The triad of minutemen ICBMs, Trident SLBMs (submarines launched nuclear missiles) and long-range stealth bombers cost only a few ten billions annually for operations and maintenance and were more than adequate for the task of deterrence.

Likewise, conventional defense of the U.S. shoreline and airspace against rogues would not require a fraction of today’s 1.3 million active uniformed force—to say nothing of the 800,000 additional reserves and national guard forces and the 765,000 DOD civilians on top of that. Rather than funding 2.9 million personnel, the whole job of national security under a homeland-based America First concept could be done with less than 500,000 military and civilian payrollers. In fact, much of the 475,000 US army could be eliminated and most of the Navy’s carrier strike groups and power projection capabilities could be mothballed. So, too, the air force’s homeland defense missions could be accomplished for well less than $50 billion per annum compared to the current $145 billion.

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New York Fed report.

Optimism of US Manufacturers “Plunged” the Most Ever (WS)

Something strange happened in the Empire State Manufacturing Survey released by the New York Fed this morning. The survey has two headline components: The index for current conditions and the index for future conditions six months down the road. The first index behaved reasonably well; the second index plunged the most ever. Executives are notoriously optimistic. In the survey, which goes back to 2001, expectations for future conditions are always higher than current conditions, and often by a big margin, even early on in the Financial Crisis before all heck was breaking loose. The index of future conditions reacts to events. For example, it spiked after Trump’s election. So today’s biggest plunge in survey history is a reaction to an event.

“Optimism tumbles,” the New York Fed’s report called it. And more emphatically: “Optimism about the six-month outlook plunged among manufacturing firms.” The headline index is based on a question about “general business conditions.” The sub-indices are based on questions about specific aspects of the manufacturing business, such as new orders, shipments, unfilled orders, employment, etc. [..] This chart shows the General Business Condition indices for current conditions (black line) and forward-looking conditions (blue line) with the plunge circled. The thin vertical red line indicates the last survey period before the November 2016 election:

The 25.8-point April plunge took the index from 44.1 points in March to 18.3 points in April, the largest monthly plunge ever. The second largest plunge (25.1 points) occurred in January 2016 as credit in the energy sector was freezing up and as the S&P 500 index was on its way to drop 19%. The third steepest plunge (24.3 points) occurred in January 2009, during the Financial Crisis. The chart below shows the month-to-month changes in the forward-looking general business conditions index:

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China doesn’t need US in cloud computing.

US Planning To Open “Third Front” In China Trade Spat (ZH)

In news that broke (conveniently, we should add) shortly after the market closed on Monday, the Wall Street Journal is reporting that the White House is gearing up for what would be the third front in its nascent trade spat with China. As the paper points out, Trade Representative Robert Lighthizer is preparing a fresh trade complaint – again under Section 301 of the Trade Act of 1974 – the same section of the trade act under which the US filed its complaint about China’s intellectual property abuses, aka the first salvo in the US’s trade war. This time, Lighthizer is aiming at China’s unfair restrictions on US companies trying to establish a foothold in China in high-tech industries like cloud computing.

As a general rule, China requires foreign firms to partner with a domestic firm in a “revenue-sharing agreement” before they can gain entry to the Chinese market. By comparison, the US allows Chinese firms like Alibaba to function almost totally unfettered. To be sure, Lighthizer has yet to decide whether to go ahead with the complaint, leaving the tariffs on steel and aluminum and the investigation into IP abuses as the only concrete actions that the White House has taken to hold China accountable for what Trump has described as decades of abuses on trade (threatening to impose tariffs on $150 billion in goods doesn’t count).

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“All hell breaks loose..”

US Cuts Off China’s ZTE From American Tech for Seven Years (BBG)

The U.S. government said Chinese telecommunications-gear maker ZTE Corp. violated the terms of a sanctions settlement and imposed a seven-year ban on purchases of crucial American technology needed to keep it competitive. The Commerce Department determined ZTE, which was previously fined for shipping telecommunication equipment to Iran and North Korea, subsequently paid full bonuses to employees who engaged in the illegal conduct, failed to issue letters of reprimand and lied about the practices to U.S. authorities, the department said. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them,” Commerce Secretary Wilbur Ross said in the statement.

“This egregious behavior cannot be ignored.” The ZTE rebuke adds to U.S.-China tensions over trade between the world’s two biggest economies. President Donald Trump threatened tariffs on $150 billion in Chinese imports for alleged violations of intellectual property rights, while Beijing vowed to retaliate on everything from American soybeans to planes. Trump on Monday accused China along with Russia of devaluing their currencies, opening a new front in his argument that foreign governments are exploiting the U.S. China’s Ministry of Commerce rapidly responded to the ZTE ban, saying it would take necessary measures to protect the interests of Chinese businesses.

It said the Shenzhen-based company has cooperated with hundreds of U.S. companies and contributed to the country’s job creation. For ZTE itself, the latest U.S. action means one of the world’s top makers of smartphones and communications gear will no longer be able to buy technology from American suppliers, including components central to its products. ZTE has purchased chips from Qualcomm and Intel, and optical components from Acacia Communications and Lumentum. A seven-year ban would effectively cover a critical period during which the world’s telecoms carriers and suppliers are developing and rolling out fifth-generation wireless technology. “All hell breaks loose,” wrote Edison Lee and Timothy Chau, analysts at Jefferies, after the export ban was announced.

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But what to believe of the numbers?

China Industrial Output, Investment Growth Miss Expectations (R.)

China’s industrial output grew 6.0% in March from a year earlier, missing expectations, while fixed-asset investment growth slowed to 7.5% in the first quarter, also below forecasts, data showed on Tuesday. Analysts polled by Reuters had predicted industrial output growth would cool to 6.2% from 7.2% in the first two months of the year. Investment growth had also been expected to ease, to 7.6% in the first three months of the year, from 7.9% in January-February. Private-sector fixed-asset investment rose 8.9% in January-March, compared with an increase of 8.1% in the first two months, the National Bureau of Statistics said on Tuesday.

Private investment accounts for about 60% of overall investment in China. Retail sales rose 10.1% in March from a year earlier, beating expectations of an increase of 9.9%, compared with a rise of 9.7% in the first two months. The government has set an economic growth target of around 6.5% this year, the same goal as in 2017. Actual growth last year came in much stronger at 6.9%, due largely to an infrastructure-led construction boom, resurgent exports and record bank lending.

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Causation, correlation.

Is Tesla The Next Enron? (MW)

There’s more than enough to get distracted by — and be nervous about — over the next few days, but judging from the upbeat premarket action on Monday, investors aren’t exactly scrambling around to load up on risk-off assets. Geopolitics aside, hope abounds that the next leg up could be fueled by what corporate leaders have to say this week regarding their quarterly results. “It is still early in the earnings season, and as we hear from the CEOs we will find out if the market will refocus on fundamentals and away from the macro news,” says Jill Carey Hall, equity strategist at Bank of America Merrill Lynch.

Tesla however, doesn’t report its results for a while. Until then, you can expect the FUD to keep flying as the haters tangle with the Musk faithful — and Musk himself — over where the company is ultimately headed. Count Harris Kupperman of Praetorian Capital among those outspoken bears, and, just like renowned short-seller Jim Chanos did late last year, he recently compared Tesla to one of the biggest fails Wall Street’s ever seen — Enron. He used this overlay, our chart of the day, to illustrate his prediction:

Elon Musk relishes the opportunity to return fire at his critics, like when he recently threw shade at the Economist for questioning Tesla’s stability. That hardly convinced Kupperman. “He hasn’t hit on any target or deliverable with any sort of reliability for years now. Why should I believe him now?” he writes. “Remember in 2016 when he said they’d be profitable and didn’t need any more money? Or when they said that in 2017? He’ll probably be saying the same thing at the bankruptcy hearing.”

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“Traditional automakers adjust bottlenecks on the fly during a launch..” “This is totally out of the ordinary.”

Tesla Puts the Brakes on Model 3 Production Line (BBG)

Tesla is temporarily suspending production of the Model 3 sedan for at least the second time in roughly two months, just after Elon Musk admitted to mistakes that hindered his most important car. The company informed employees that the pause will last four to five days, Buzzfeed reported Monday. A Tesla spokesman referred back to a statement provided last month, when Bloomberg News first reported that Model 3 production was idled from Feb. 20 to 24. The carmaker said then that it planned periods of downtime at both its vehicle and battery factories to improve automation and address bottlenecks. The hiatus is another setback for the first model Musk has tried to mass-manufacture.

In addition to trying to bring electric vehicles to the mainstream, the chief executive officer had sought to build a competitive advantage over established automakers by installing more robots to quickly produce vehicles. Last week, he acknowledged “excessive” automation at Tesla was a mistake. “Traditional automakers adjust bottlenecks on the fly during a launch,” Dave Sullivan, an analyst at AutoPacfic Inc., said in an email. “This is totally out of the ordinary.” Tesla employees are expected to use vacation days or stay home without pay during the Model 3 downtime, though a small number may be offered paid work elsewhere at the factory in Fremont, California, Buzzfeed reported.

The shutdown is taking place a week after Musk gave CBS This Morning a tour of Tesla’s assembly plant and said the company should be able to sustain producing 2,000 Model 3 sedans a week. He said manufacturing issues that had been crimping output were being resolved and that Tesla probably will make three or four times as many of the cars in the second quarter. Tesla built 9,766 Model 3 sedans in the first quarter. The company said in an April 3 statement that the process of boosting production and addressing bottlenecks during the first three months of the year included “several short factory shutdowns to upgrade equipment.”

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Will Zuck ‘honor’ the invitation. Looks like he may have to.

Facebook’s Next Big Headache: Europe (Axios)

The risk to Facebook’s business coming out of last week’s Mark Zuckerberg hearings is minimal. The threat to its business in the EU, where aggressive regulation has already passed, is massive. The latest: The European Parliament has issued a second invitation to Facebook CEO Mark Zuckerberg to appear at a joint committee heating. EU Justice Commissioner Vera Jourova had a phone exchange with Facebook COO Sheryl Sandberg urging Zuckerberg to pay the Parliament a visit, according to the Associated Press. “I expect that Mr Zuckerberg will take this invitation because I believe that face-to-face communication and being available for such communication will be a good sign that Mr. Zuckerberg understands the European market,” Jourova told CNBC Friday.

“Facebook has more active users in Europe than in the US,” tweeted parliament member Guy Verhofstadt. “We expect Mark Zuckerberg to come to the European Parliament and explain how he will make sure Facebook respects [the forthcoming General Data Protection Regulation].” Facebook spent more than $2.5 million on its in-house lobbying in Europe last year, according to disclosure records. The company says that a total of 15 staff are involved in its EU lobbying efforts. European regulation was a prime topic of discussion even during Zuckerberg’s congressional hearings last week. Sandberg visited Brussels in January to discuss Facebook’s commitment to privacy and compliance with Europe’s new sweeping privacy rules.

Facebook faces several very real threats to its business model in Europe this spring.

• GDPR: The sweeping General Data Protection Regulation will go into effect in late May, putting in place strict new privacy rules. U.S. tech firms face punitive fines if they do not comply.
• ePrivacy: An updated version of the EU’s ePrivacy directive, which is set to go in effect in conjunction with GDPR in May 2018, will add greater regulation of data tracking through cookies and users’ ability to opt-out of data collection.
• Antitrust: Facebook was fined by EU antitrust commissioner Margrethe Vestager last May for allegedly misleading officials when it acquired WhatsApp. She signaled to reporters in Washington last week that she’s still keeping an eye on the social giant, but noted that the European government has no official stance on whether the company is a monopoly. She said a German probe and new data rules could mitigate some concerns about Facebook’s power.

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When your defense is that others did it too, you’re not winning.

Facebook Hit With Class Action Suit Over Facial Recognition Tool (AFP)

A US federal judge in California ruled Monday that Facebook will have to face a class action suit over allegations it violated users’ privacy by using a facial recognition tool on their photos without their explicit consent. The ruling comes as the social network is snared in a scandal over the mishandling of 87 million users’ data ahead of the 2016 US presidential election. The facial recognition tool, launched in 2010, suggests names for people it identifies in photos uploaded by users – a function which the plaintiffs claim runs afoul of Illinois state law on protecting biometric privacy. Judge James Donato ruled the claims by Illinois residents Nimesh Patel, Adam Pezen, and Carlo Licata were “sufficiently cohesive to allow for a fair and efficient resolution on a class basis.

“Consequently, the case will proceed with a class consisting of Facebook users located in Illinois for whom Facebook created and stored a face template after June 7, 2011,” he said, according to the ruling seen by AFP. A Facebook spokeswoman told AFP the company was reviewing the decision, adding: “We continue to believe the case has no merit and will defend ourselves vigorously.” Facebook also contends it has been very open about the tool since its inception and allows users to turn it off and prevent themselves from being suggested in photo tags. The technology was suspended for users in Europe in 2012 over privacy fears.

Also on Monday, Facebook confirmed that it collected information from people beyond their social network use. “When you visit a site or app that uses our services, we receive information even if you’re logged out or don’t have a Facebook account,” product management director David Baser said in a post on the social network’s blog. Baser said “many” websites and apps use Facebook services to target content and ads, including via the social network’s Like and Share buttons, when people use their Facebook account to log into another website or app and Facebook ads and measurement tools. But he stressed the practice was widespread, with companies such as Google and Twitter also doing the same.

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We’re booming.

US Freight Expenditures Surge 15.6% from Year Ago (WS)

Shipment volumes in the US by truck, rail, air freight, and barge combined surged 11.9% year-over-year in March, according to the Cass Freight Index. This pushed the index, which is not seasonally adjusted, to its highest level for any month since 2007 and for any March since 2006:

After the US transportation recession in 2015 and 2016, the industry was recovering at an every faster pace. In the chart above, note how the red line (2017) outpaced the black line (2016). And 2018 has turned into a transportation boom. March is normally still in the slow part of the year, but this March blew past even June 2014, the banner month since the Financial Crisis! “Volume has continued to grow at such a pace that capacity in most modes has become extraordinarily tight,” Cass explained. “In turn, pricing power has erupted in those modes.” The chart below shows the year-over-year percentage changes in the index for shipment volumes. Note the double-digits spikes over the past three months:

The index, which is based on $25 billion in annual freight transactions, according to Cass Information Systems, covers all modes of transportation — rail, truck, barge, and air — for consumer packaged goods, food, automotive, chemical, OEM, and heavy equipment but not bulk commodities, such as oil, coal, or grains. This kind of surge in volume has consequences in this cyclical business. During the “transportation recession,” orders for heavy Class 8 trucks collapsed, triggering lay-offs and throughout the truck and engine manufacturing industry. The opposite is now the case: Orders for heavy trucks are hitting records.

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Yeah, it’s a vulnerable system we’ve built. And that goes for all sides.

US and UK Blame Russia For ‘Malicious’ Cyber-Offensive (G.)

The cyberwar between the west and Russia has escalated after the UK and the US issued a joint alert accusing Moscow of mounting a “malicious” internet offensive that appeared to be aimed at espionage, stealing intellectual property and laying the foundation for an attack on infrastructure. Senior security officials in the US and UK held a rare joint conference call to directly blame the Kremlin for targeting government institutions, private sector organisations and infrastructure, and internet providers supporting these sectors. Rob Joyce, the White House cybersecurity coordinator, set out a range of actions the US could take such as fresh sanctions and indictments as well as retaliating with its own cyber-offensive capabilities. “We are pushing back and we are pushing back hard,” he said.

Joyce stressed the offensive could not be linked to Friday’s raid on Syria. It was not retaliation for the US, UK and French attack as the US and UK had been investigating the cyber-offensive for months. Nor, he said, should the decision to make public the cyber-attack be seen as a response to events in Syria. Joyce was joined in the call by representatives from the FBI, the US Department of Homeland Security and the UK’s National Cyber Security Centre (NCSC), which is part of the surveillance agency GCHQ.

The US and UK, in a joint statement, said the cyber-attack was aimed not just at the UK and US but globally. “Specifically, these cyber-exploits were directed at network infrastructure devices worldwide such as routers, switches, firewalls, network intrusion detection system,” it said. “Russian state-sponsored actors are using compromised routers to conduct spoofing ‘man-in-the-middle’ attacks to support espionage, extract intellectual property, maintain persistent access to victim networks and potentially lay a foundation for future offensive operations. “The current state of US and UK network devices, coupled with a Russian government campaign to exploit these devices, threatens our respective safety, security, and economic wellbeing.”

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That’s a lot of potential clients you’re missing out on. And potential loans to issue.

One In Three UK Millennials Will Never Own A Home (G.)

One in three of will never own their own home, with many forced to live and raise families in insecure privately rented accommodation throughout their lives, according to a report by the Resolution Foundation. In a gloomy assessment of the housing outlook for approximately 14 million 20- to 35-year-olds, the thinktank’s intergenerational commission said half would be renting in their 40s and that a third could still be doing so by the time they claimed their pensions. It predicted an explosion in the housing benefits bill once the millennial generation reaches retirement.

“This rising share of retiree renters, coupled with an ageing population, could more than double the housing benefit bill for pensioners from £6.3bn today to £16bn by 2060 – highlighting how everyone ultimately pays for failing to tackle Britain’s housing crisis,” the report read. It calls for a radical overhaul of the private rented sector, proposing a three-year cap on rent increases, which would not be allowed to rise by more than the consumer price index, currently 2.5%. The report adds to a growing chorus of demands for rent stabilisation. Jeremy Corbyn called for rent control during his speech at the Labour party conferencelast year.

The Resolution Foundation wants “indeterminate” tenancies as the sole form of contract in England and Wales. These would replaced the standard six-month or 12-month contracts demanded by most landlords. The thinktank said this would follow , where open-ended tenancies began in December 2017, and is the standard practice in Germany, the Netherlands, Sweden and Switzerland. Greater security of tenancy is vital as more families are raised in the private rented sector, the report said. The number of privately renting households with children has tripled from 600,000 in 2003 to 1.8m in 2016.

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How bad is it? “About 1 million plastic bottles are sold each minute around the globe..”

Scientists Accidentally Create Mutant Enzyme That Eats Plastic Bottles (G.)

Scientists have created a mutant enzyme that breaks down plastic drinks bottles – by accident. The breakthrough could help solve the global plastic pollution crisis by enabling for the first time the full recycling of bottles. The new research was spurred by the discovery in 2016 of the first bacterium that had naturally evolved to eat plastic, at a waste dump in Japan. Scientists have now revealed the detailed structure of the crucial enzyme produced by the bug. The international team then tweaked the enzyme to see how it had evolved, but tests showed they had inadvertently made the molecule even better at breaking down the PET (polyethylene terephthalate) plastic used for soft drink bottles.

“What actually turned out was we improved the enzyme, which was a bit of a shock,” said Prof John McGeehan, at the University of Portsmouth, UK, who led the research. “It’s great and a real finding.” The mutant enzyme takes a few days to start breaking down the plastic – far faster than the centuries it takes in the oceans. But the researchers are optimistic this can be speeded up even further and become a viable large-scale process. “What we are hoping to do is use this enzyme to turn this plastic back into its original components, so we can literally recycle it back to plastic,” said McGeehan. “It means we won’t need to dig up any more oil and, fundamentally, it should reduce the amount of plastic in the environment.”

About 1m plastic bottles are sold each minute around the globe and, with just 14% recycled, many end up in the oceans where they have polluted even the remotest parts, harming marine life and potentially people who eat seafood. “It is incredibly resistant to degradation. Some of those images are horrific,” said McGeehan. “It is one of these wonder materials that has been made a little bit too well.” However, currently even those bottles that are recycled can only be turned into opaque fibres for clothing or carpets. The new enzyme indicates a way to recycle clear plastic bottles back into clear plastic bottles, which could slash the need to produce new plastic.

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Most intelligent species ever.

More Than 95% Of World’s Population Breathe Dangerous Air (G.)

More than 95% of the world’s population breathe unsafe air and the burden is falling hardest on the poorest communities, with the gap between the most polluted and least polluted countries rising rapidly, a comprehensive study of global air pollution has found. Cities are home to an increasing majority of the world’s people, exposing billions to unsafe air, particularly in developing countries, but in rural areas the risk of indoor air pollution is often caused by burning solid fuels. One in three people worldwide faces the double whammy of unsafe air both indoors and out.

The report by the Health Effects Institute used new findings such as satellite data and better monitoring to estimate the numbers of people exposed to air polluted above the levels deemed safe by the World Health Organisation. This exposure has made air pollution the fourth highest cause of death globally, after high blood pressure, diet and smoking, and the greatest environmental health risk. Experts estimate that exposure to air pollution contributed to more than 6m deaths worldwide last year, playing a role in increasing the risk of stroke, heart attack, lung cancer and chronic lung disease. China and India accounted for more than half of the death toll.

Burning solid fuel such as coal or biomass in their homes for cooking or heating exposed 2.6 billion people to indoor air pollution in 2016, the report found. Indoor air pollution can also affect air quality in the surrounding area, with this effect contributing to one in four pollution deaths in India and nearly one in five in China. Bob O’Keefe, vice-president of the institute, said the gap between the most polluted air on the planet and the least polluted was striking. While developed countries have made moves to clean up, many developing countries have fallen further behind while seeking economic growth.

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Jul 032014
 July 3, 2014  Posted by at 3:04 pm Finance Tagged with: ,  7 Responses »

Harris & Ewing Crescent Limited train wreck near Kenilworth, DC August 1933

First, let me take a second to get back to my article yesterday, Optimism Bias Squared , because I got a mail from someone at the IMF (who requests anonymity), which refers to a working paper that was released by the IMF at the same time I wrote my article:

Howdy, long-time [Automatic Earth] reader (and listener and note-taker) here, just wanted to share a serendipitous artifact:

Growth: Now and Forever?

 The meat in a single sentence: “Further, by comparing the IMF’s World Economic Outlook forecasts with actual growth outcomes, we show that optimism bias is greater the longer the forecast horizon.”

From the Introduction to the paper (which you can download by clicking the title/link):

Optimism bias and wishful thinking about the future are well documented human tendencies. A specific manifestation of optimism bias is the overestimation of the relevance of recent positive outcomes when predicting future outcomes. Economic growth forecasts are no exception [..] Drawing on these observations, Pritchett and Summers (2013) have recently argued that, for example, most medium- and long-term economic growth forecasts available at the time of writing for China and India – where growth has been exceptionally high for more than a decade – are overly optimistic. [..]

In this paper, we gauge the degree of optimism bias—and the extent to which the persistence of strong growth may be overestimated—in economic forecasts at horizons of increasing length. We are especially interested in projections made over longer-term horizons; thus, we analyze economic growth forecasts for horizons of up to twenty years, which we draw from the debt sustainability analysis (DSA) exercises routinely undertaken by IMF and World Bank teams for a large sample of countries. Projecting a country’s economic growth into the medium term and beyond is notoriously difficult.

At the same time, getting the growth projections wrong has major adverse consequences. For example, overestimating future economic growth implies underestimating the government debt-to-GDP ratio that will be reached at the end of the projection period (in the absence of corrective policy measures). As a result, either the country will end up with a higher-than-expected debt ratio, which could result in a debt crisis, or future policymakers will have to tighten fiscal policy abruptly – with disruptive consequences – at a later stage.

So now we know that there are people at the IMF who A) read The Automatic Earth and B) do work on optimism bias (though they’re not necessarily the same people). And that made me return to an optimism bias piece I wrote on November 18, 2012, in which I focused on our talent and penchant for telling lies, and said for instance:

Optimism Bias: What Keeps Us Alive Today Will Kill Us Tomorrow

When Jack Nicholson said you don’t want the truth because you can’t handle the truth, he was talking to a much wider audience than we would like to acknowledge. And so we get what we get. Still, you can’t always get what you want. In the end, all that’s left is what you need. And we know that, unconsciously. It’s just that in the meantime we like to be sitting pretty. And not think about the fact that this very attitude of ours will hasten and worsen the end. We’re creatures bent on instant gratification. Which is, come to think of it, precisely why we have our optimism bias in the first place.

Whatever it is that’s going wrong, and there’s more of that than we can summarize right here and now, the tragedies we create rival those of the ancient Greeks, which in and of itself shows that we never learned much. Voltaire in his 1759 Candide told us to replace “all is for the best in the best of all possible worlds” with “we must cultivate our garden”. Never took that to heart either. Like all those before us, we’ll walk right into our tragic futures thinking everything will be alright. ‘Cause that’s who we are. Our tragedies will be as over the top bloody and deadly too as the Greeks’ were.

It also contains this great graph that shows by how much EU GDP growth predictions are habitually off. Initial predictions come in 6%-8% too optimistic.

I don’t believe this is a methodology going wrong, it’s too systematic and too similar for that. I think this is established policy, and not just for the EU. The difference between initial and ‘final’ numbers for US Q1 GDP was also some 5%-6%. The way it functions is that by the time the real numbers come in, they’re so far back in the rearview mirror, people see them as hardly relevant anymore. And you can bet your donkey that the BEA’s first Q2 estimate, due July 30, will come in glorious and shining, only to be revised along the trajectory of a falling brick in subsequent ‘estimates’. It’s not an error, it’s a tried and tested MO.

As for today’s great BLS jobs numbers, they exhibit the exact same underlying line of reasoning. 288.000 new jobs sounds great, and so does a drop to a 6.1% unemployment rate, but when it comes to government numbers, things are never even close to what they seem. And besides, we still have a number of grandiose discrepancies. Like the -2.96% US Q1 GDP negative growth. And the not positive at all small business sentiment, as expressed in last month’s National Federation of Independent Business (NFIB) news release, which said among other things that ” … the Index is still far below readings that have normally accompanied an expansion” and “… the four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components such as expectations about sales and business conditions … “

And as should by now be obvious, we need to peek behind the veil(s) of the BLS’ own numbers as well. As Tyler Durden did just now:

People Not In Labor Force Rise To New Record, Participation Rate Remains At 35 Year Lows

Those following the labor force participation rate (which as even the Census Bureau showed is declining not so much due to demographics but due to older people working longer and pushing younger people out of the labor force as we showed yesterday) will hardly be surprised to learn that alongside today’s impressive NFP print, the reason why the unemployment rate took another big step lower from 6.3% to 6.1%, was once again as a result of the number of people not in the labor force, which in June rose to a fresh record high of 92,120K, up 111K from May.

[..] … the labor force participation rate remained flat at 62.8%, matching the lowest print since 1978.

Do we still realize at all (or have we become too apatetic?) what it means that over 92 million working age Americans are not counted as being in the labor force? That’s almost 30 million more than in 1990, not far shy from a 50% increase in just 25 years. And we nevertheless feel optimistic about this ‘recovery’ we’ve been hearing about for years now, that’s just behind the corner? You know where I’m pretty sure that recovery really is? Just behind the horizon. Durden fished out another dubious stat from the BLS report:

June Full-Time Jobs Plunge By Over Half A Million, Part-Time Jobs Surge By 800K, Most Since 1993

Is this the reason for the blowout, on the surface, payroll number? In June the BLS reports that the number of full-time jobs tumbled by 523K to 118.2 million while part-time jobs soared by 799K to over 28 million! [..] Something tells us that the fact that the BLS just reported June part-time jobs rose by just shy of 800,000 the biggest monthly jump since 1993, will hardly get much airplay today. Because remember: when it comes to jobs, it is only the quantity that matters, never the quality.

To summarize, in today’s BLS report, which is of course subject to several revisions to be announced later, we see 288,000 new jobs. But full time jobs fell by almost double that number, 523,000. Only to be ‘replaced’ by 799,000 part time jobs. Then we also see a falling unemployment rate, but that’s largely because 111,000 additional people are no longer counted as being in the labor force.

I humbly suggest you get up out of your chair, find yourself a mirror to look in, and tell the you that you see there exactly how optimistic you feel. And I know stocks are up again, but by now it should dawn upon us all that this is being achieved solely by gutting our entire societies. And what are we going to do when that is our new reality?

Stocks Are Officially More Overvalued Than In Last Bubble Peak (Zero Hedge)

Over the weekend we showed that when it comes to fugding what one means by EPS (GAAP, non-GAAP, Pension accounting adjusted, etc), there is a virtually endless spectrum how one can make what is now effectively a 20x LTM P/E market appear as a “reasonably” valued 16.5x. But while fudging snapshot earnings is one thing, presenting an “apples-to-apples” valuation trend based on any one given methodology is something different, and provides a much needed continuum of (over) valuation. Which is why we go to the just released Q3 Guide to the Markets released by JPM Asset Management where we read the following:

  • Current forward S&P 500 P/E: 15.6x
  • Forward S&P 500 P/E on October 9, 2007: 15.2x

Needless to say, this assumes the current consensus for Non-GAAP earnings growth is accurate, which as we explained previously is driven almost entirely by “one-time charge” addbacks: addbacks which traditionally peak just before recessions strikes. But all of the above is “noise” to quote Janet Yellen. One quick look at the chart below and it becomes immediately clear that the 190% surge in the S&P since the 2009 lows has been entirely on the $10 trillion (excluding China’s $25 trillion in new financial debt) in central bank created liquidity.

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Farrell’s take on politics and markets.

The Great Obama Bull Market Will Roar Till 2016 (Paul B. Farrell)

Yes, it’s time to celebrate. We’re in a historic bull market. GOP conservatives keep fighting the wrong war, against the Obama economy. Meanwhile, the Obama bull market keeps roaring ahead!. And the long term looks even better: Bullish pundits predict stocks will continue climbing into the 2016 presidential election. Folks, this stock market has been roaring since March 2009 when the DJIA bottomed at 6,547, a painful 53.9% drop from the October 2007 high of 14,164 during the Wall Street bank credit crash in Bush’s last year as president. The S&P 500 also bottomed, at 676, a 56.6% drop. However, since March 2009 the stock market has been steadily climbing. Over five years.

And the DJIA’s made a remarkable recovery, to just under its next big milestone, 17,000. While the S&P500 is nearing 2,000, headed up. Yes, market gains over 250% … and still climbing! So what can we expect from the stock market by 2016 and the election of the next American president? More! Fabulous 250% gains so far. And bigger gains possible coming in the next couple years till we elect a new president. Maybe over 300%. Gains likely to favor a Democrat. Get it? GOP conservatives may have been successful in slowing America’s economic recovery. But the stock market is actually getting surprisingly stronger from this political war. With every Obama progressive move — Obamacare, ERA regulations, equal pay for women, gay rights, minimum wages, stem-cell research, immigration, Osama bin Laden, deficit cuts and so much more — GOP conservatives and the tea party learn little, only hear enough for another attack on Obama, offer no solutions, just opposition.

But the bull market keeps roaring and roaring. Get it? As the war against all-things-Obama accelerates, as the economic recovery slows, as the GOP fights infrastructure funding, as they fail to pass jobs stimulus programs … the stock market gets stronger, roars bullishly ahead.

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Two pieces on how US law bankrupts nations. Better change that law fast. Or the consequences won’t be pretty.

Why The World Is Choking On Debt (Roubini)

Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. But the ongoing legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken. Individuals, firms, or governments may end up with too much debt because of bad luck, bad decisions, or a combination of the two. If you get a mortgage but then lose your job, you have bad luck. If your debt becomes unsustainable because you borrowed too much to take long vacations or buy expensive appliances, your bad behavior is to blame. The same applies to corporate firms: some have bad luck and their business plans fail, while others borrow too much to pay their mediocre managers excessively.

Bad luck and bad behavior (policies) can also lead to unsustainable debt burdens for governments. If a country’s terms of trade (the price of its exports) deteriorate and a large recession persists for a long time, its government’s revenue base may shrink and its debt burden may become excessive. But an unsustainable debt burden may also result from borrowing to spend too much, failure to collect sufficient taxes, and other policies that undermine the economy’s growth potential. When the debt burden of an individual, firm, or government is too high, legal systems need to provide orderly ways to reduce it to a more sustainable level (closer to the debtor’s potential income). If it is too easy to default and reduce one’s debt burden, the result is moral hazard, because debtors gain an incentive to indulge in bad behavior. But if it is too difficult to restructure and reduce debts when bad luck leads to unsustainable debts, the result is bad for both the debtor and its creditors, who are better off when a reduced debt ratio is serviced than when a debtor defaults.

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How Bankruptcy Laws Are Bankrupting States (RT)

Just about the first thing any law student learns about contracts is the rule “Pacta sunt servanda,” which means, “Agreements must be kept.” The second thing they learn are all the exceptions to this rule, because the truth is that you can take a good thing too far. While honoring obligations to the full is certainly a good thing, it might not be the best in all circumstances. Law does not concern itself solely with what’s fair for the individual, but also with what’s best for society. To this end, modern bankruptcy laws (also sometimes known as insolvency laws, but I am going to stick with bankruptcy here for the sake of simplicity) not only salvage as many assets for creditors as possible, they also seek to allow all parties involved a fresh start financially.

This happens, for example, when the bankrupt person is discharged, usually after having made repayments for a certain number of years (but not necessarily amounting to the total amount owed) or when an insolvent company is wound up, in which case it ceases to exist and no further claims are possible. Of course, a bankruptcy of any kind is hard on creditors. They typically receive only a fraction of monies owed, often well under 10%. However, it is important to remember that the creditor almost invariably sets all conditions for the loan, including whether to make it in the first place. Earned interest protects them against the losses from any one loan going bad and they are also free to secure their loans. So while it might initially seem unfair to discharge bankrupts who have not paid off their debts in full, it actually strikes a very good balance between the interests of both parties. Irresponsible lending and irresponsible borrowing are but two sides to the same coin. But what happens when the borrower is not a person or a company, but a country?

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When money is free, when one doesn’t have to work for it, the entire economy falls to pieces.

Buyback Mania Cuts Growth And Leaves Financial Wrecks Behind (Stockman)

Janet Yellen is a chatterbox of numbers, but most of them are ‘noise’. And that’s her term. Yet here is a profoundly important set of numbers that you haven’t heard boo about from Yellen and her mad money printers. To wit, during the ‘difficult’ economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That s right, 95 cents of every dollar they earned including the huge gains from restructurings, downsizings and job terminations was flushed right back into the Wall Street casino.

Self-evidently, the corporate form of business organization is designed such that some considerable portion of net earnings should be returned to their owners each year. But a 95% rate of distribution is a giant aberration. Were this outcome to occur on the undisturbed free market, for example, it would signal an economy that is dead in the water and that participating companies face a dearth of opportunities to reinvest profits in future growth. Needless to say, that is the opposite of the ‘growth’ and ‘escape velocity’ story that currently excites stock market punters, and is wildly inconsistent with present capitalization rates in the stock market. That is, in a world of permanent zero growth and nearly 100% earnings distribution, the S&P 500’s current 19X PE on reported earnings would be wildly too high. The more appropriate PE would be in high single digits.

So the $3.8 trillion of dividends and buybacks since Q1 2008 reflects not the natural economics of the market at work, but the artificial regime of monetary central planning and the tax-advantaged treatment of corporate debt. Corporations are eating their seed corn because boards and CEO’s function in a Fed-created financial casino where they are massively incentivized to feed the fast money beast with ever larger share buyback programs in order to shrink the float and goose per share earnings. Doing so generates plump stock option gains, and failure to do so will bring on the black plague of shareholder “activists” agitating for big stock buybacks with borrowed money, and a new CEO and board, too.

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Once and for all.

The ‘Plunging Labor Force Participation Rate’ Debate Ends Here (Zero Hedge)

And to think we have none other than the US Commerce Department to thank for issuing the one report which not only refutes all wrong “explanations” of the collapsing labor force participation rate, propagated by the Bureau of Labor Statistics and the Fed itself. that blame said plunge on demographics, but once and for all slams the door shut on any future debate about just the New Normal secular shifts within the aging US population truly are. From: “65+ in the United States: 2010”:

On the one hand, the recession forced some workers to retire sooner than planned. On the other hand, the declines in housing and financial asset prices pushed many workers to delay retirement. The decision of when to retire was being influenced by opposing factors: (1) the decline in stock market prices and lowered housing values supported retirement delays, and (2) the rise in unemployment and greater difficulty among older adults in finding another job supported earlier retirement (Hurd and Rohwedder, 2010b). Among those nearing retirement age (age 50 to 61), 63% reported pushing back their expected retirement date as a result of economic conditions (Taylor et al., 2009a).

In 2010, 16.2% of the population aged 65 and over were employed, up from 14.5% in 2005. In contrast, 60.3% of the 20 to 24 age group were employed in 2010, down from 68.0% in 2005. Employment shares declined from 2005 to 2010 for all age groups younger than age 55. There was no statistical change in the employment share for workers aged 55 to 64 nor those aged 70 to 74. Engemann and Wall (2010) found that more people aged 55 and over were employed during the recession than would have been if there was no recession. Using the Bureau of Labor Statistics employment data, Engemann and Wall found that during the 2007–2009 period, employment grew by 7.4% for the population aged 55 and over. Based on trends prior to the recession, employment for this age group was expected to grow by only 6.1%. All younger age groups experienced a decline in employment during the same 2007 to 2009 period.

Oh, we almost forgot the punchline: dear US “retirees” – if you want to mitigate the impact of the US depression and the loss of savings income courtesy of the Fed’s ZIRP policy, all you have to do is, well, work until you die.

Many older workers managed to stay employed during the recession; in fact, the population in age groups 65 and over were the only ones not to see a decline in the employment share from 2005 to 2010 (Figure 3-25)… Remaining employed and delaying retirement was one way of lessening the impact of the stock market decline and subsequent loss in retirement savings.

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Bubble, bubble, bubble.

How Wall Street Manipulates The Entire US Housing Racket Market (TPit)

Private equity firms are the ultimate smart money on Wall Street; they know how to wring out the last dime from their own clients, such as pension funds and rich individuals, through hidden fees, obscure expenses, elaborate expense shifting, lackadaisical disclosure, and “zombie advisers,” to the point where SEC Inspection Chief Andrew Bowden singled them out in a speech in May. Now the lawyers are circling. And these PE firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another PE product, American Homes 4 Rent, which went public last summer as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.

And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda. The smart money on Wall Street had a goal. And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:

A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up. Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.

The problem with that strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing. From gobbling up and finding renters to … Selling, securitizing, and consolidating. But selling them to first-time buyers at these prices – well, forget it. So Waypoint Real Estate Group is trying to “quietly” unload half its inventory of 4,000 homes in California to another company. It also manages another 7,000 homes that an affiliated REIT owns. Och-Ziff Capital Management Group and Oaktree Capital Management have already started selling their homes. Other firms, including Blackstone Group and American Homes 4 Rent have pulled back from buying homes as prices have soared.

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‘The SEC rarely denies such waivers because such a move risks destabilizing financial firms.’

Too Big To BNProsecute: Another Criminal Bank Gets Away (Zero Hedge)

Remember when the DOJ’s banker lackey, assistant attorney general Lanny Breuer admitted to PBS that the US Department of Justice (sic) does not prosecute big banks because they are too systematically important and thus, above the law? Breuer was promptly fired (only to rejoin Covington & Burling as vice chairman and head the firm’s white collar defense practice) and with his departure the DOJ was said to have “fixed” its practice of giving banks, the more massive and insolvent the better, not only a “get out of jail” card but “do not even enter the courtroom” card. Ironically, all of the DOJ’s subsequent wrath fell mostly on foreign banks (with domestic banks actually benefiting from the addback of “one-time, non-recurring” legal charges to their non-GAAP bottom line).

It goes without saying, that not a single banker has still gone to jail since the infamous Too Big To Prosecute incident, suggesting it was all, once again, merely lip service to so-called justice. But nowhere is it clearer that nothing at all has changed when it comes to crony capitalist behind the scenes muppetry, than in the latest Reuters exclusive of the white glove treatment “evil” BNP got in order to make sure the full wrath of US justice doesn’t damage the criminal money launderer too severely.

An official at the U.S. Securities and Exchange Commission (SEC) broke ranks with other commissioners, and voted against granting BNP Paribas a critical waiver to continue operating several investment advisory units in the United States. Kara Stein, a Democratic SEC commissioner who has recently demanded more accountability for big banks who break the law, was the sole dissenting vote on Monday on the temporary waiver, according to a document made public this week. BNP’s application was granted the same day that BNP, France’s largest bank, pleaded guilty to criminal charges it violated U.S. sanctions. The temporary waiver will become permanent, unless an “interested person” in the matter is granted a hearing. The deadline for requesting a hearing is July 25. The SEC rarely denies such waivers because such a move risks destabilizing financial firms.

Which all leads us to this:

The New York state banking regulator on Monday separately decided not to pull BNP’s banking license in the state, despite a criminal guilty plea, because of the risk it could put BNP out of business.

And as is well known, we can’t risk a bank going out of business because of its criminal actions, now can we. As for actually sending someone to jail? Don’t make us laugh.

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Yellen really is incompetent.

Yellen Drives Wedge Between Monetary Policy, Financial Bubbles (Reuters)

Monetary policy faces “significant limitations” as a tool to counter financial stability risks, Federal Reserve Chair Janet Yellen said on Wednesday, adding that heading off the U.S. housing bubble with higher interest rates would have caused major economic damage. Weighing in on a global debate, Yellen reiterated her view that regulation – not rate policy – needs to play the lead role in combating excessive financial risk-taking. “The potential cost … is likely to be too great to give financial stability risks a central role in monetary policy discussions,” Yellen said at an event sponsored by the International Monetary Fund. She didn’t close the door entirely, however, and she cited some areas that bore monitoring with an eye toward a possible tightening of regulation.

Analysts said Yellen was pushing back against some Fed officials who believe financial stability should be given a more prominent place in formulating monetary policy. Jeremy Stein, who stepped down as a Fed governor in May, had sparked the debate by arguing higher rates should at least be considered to help stamp out possible asset bubbles, and a number of regional Fed bank presidents have warned of the dangers of keeping rates near zero for too long. But Yellen made clear she did not see a need for the U.S. central bank to alter its current course. “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment,” she said.

The U.S. stock and bond markets have soared on the back of the Fed’s money-printing and near-zero rates, prompting warnings from some economists that new bubbles are forming. The IMF said last month a prolonged period of ultra-low U.S. rates – they have been near zero since late-2008 – had prompted a weakening in lending standards and risky behavior by investors. For her part, Yellen pointed to unusually narrow corporate bond spreads, a lack of financial volatility and weak lending standards in the leveraged-loan market as areas of concern. “It is critical for regulators to complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system,” she said.

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Yellen Warns Of Pockets Of Increased Risk-Taking (CNBC)

Falling corporate bond spreads and volatility indicators are signs that investors may not fully appreciate the risk of future losses, Fed Chair Janet Yellen warned on Wednesday. Taking a variety of factors into consideration, “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” she said. “That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach,” Yellen said in prepared remarks for a speech at the International Monetary Fund.

Yellen noted that monetary policy was limited in its ability to promote financial stability, and that low rates can raise incentives to take on risk. She also cautioned about easier terms in the leveraged loan market as investors chase higher yields. “To date, we do not see a systemic threat from leveraged lending,” Yellen said, adding that borrowers do not appear to be taking on excess debt and that lenders appear resilient to potential losses. But she said it was important to monitor the steps already taken to build resilience, to ensure they are still working, and to be flexible about using monetary policy if conditions change.

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Ugly Abe.

Japanese Real Wages Tumble Most Since Lehman (Zero Hedge)

Just when you thought things could not get any worse for Abe and his experimentation in monetary policy alchemy… it does. Between surging inflation and stagnant wage growth, real wages for the Japanese fell by their most since the collapse of Lehman. Even the break of a 23-month streak of base wage drops was dismissed by the government as “expected to be revised lower.” As Goldman warns, downside economic risks remain high, the J-curve is ‘delayed’, and with tumbling cabinet approval ratings and soaring personal disapproval ratings, Abe has a major problem on his hands…

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Ambrose does a nice take down of Juncker. Britain will leave the EU, they have no alternative. And it won’t just be Britain.

Juncker Is Galling For Britain, Life-Threatening For France And Italy (AEP)

The sovereign parliaments of Europe are victims of a constitutional sleight of hand, though some acquiesce more easily than others. The Cromwellian method by which Jean-Claude Juncker was foisted upon the nation states is a breach of the Treaties. The episode clarifies the need for British withdrawal from the Union, or the withdrawal of France or any other country that wishes to remain self-governing under a rule of law. The Lisbon Treaty did not create a European state in any shape or form. France and Britain fought ferociously to stop this happening when the text was drafted, in its original form as the European Constitution. They insisted that the EU remain an “intergovernmental” treaty club, and rightly so. To do otherwise would eviscerate national democracies without putting anything workable in their place.

Germany’s push for an EU federal state – idealistic and dangerous in equal measure – was defeated. The canny duet of Valery Giscard d’Estaing and Lord Kerr saw off the threat. The Treaty that emerged did not give the European Parliament powers to pick the head of the Commission. The prerogative lies entirely with elected EU leaders accountable to their own voters, a safeguard that anchors authority in the sovereign states. Euro-MPs have the right to turn down the Commission. They may not appoint it. Yet that is exactly what they have just done. A clique of hardliners in Strasbourg rammed through Mr Juncker on a series of spurious claims. Craven EU leaders accepted the fait accompli, either to trade concessions or to curry favour with Berlin. These Rump Parliamentarians clothe their office-seeking and grasp for patronage in the bunting of democracy, asserting that the centre-Right group (EPP) has the authority to impose its choice because it “won” the European elections.

Yet the earthquake upset in May went entirely in the opposite direction, a primordial scream by Europe’s peoples against EU overreach and the job destruction of crude austerity. The Front National won in France with calls for euro-exit and a visceral rejection of the EU Project, a watershed event in a country that is still the beating heart of Europe. You have to be politically unhinged to think it wise or proper now to entrust the EU machinery to an arch-insider, as responsible as any man alive for the calamitous decisions that have led Europe into its current cul de sac, and a master of the Monnet Method to boot. “We take a decision, then put it on the table and wait to see what happens. If there is no protest, because most people have no idea what we are doing, we take step after step until we are beyond the point of no return,” he once told Der Spiegel.

He is a gift to the Front’s Marine Le Pen, now vowing to boycott the Strasbourg ratification as her first act of protest. “I will not participate in a vote for the prison gaoler: I will try the escape the prison,” she said. He is a gift too to the Five Star Movement of Italy’s Beppe Grillo, seizing on Mr Juncker as the face of the scorched-earth policies that have trapped Europe in a Lost Decade. “Wherever Juncker goes in Europe, the grass no longer grows,” he said. The EPP suffered the biggest proportional fall in the elections. Almost nobody voting for Greece’s New Democracy knew they were at the same time picking Mr Juncker to oversee their fate for five years, the same man who played such a large role in their own national drama as head of the Eurogroup. How many Irish voted for the EPP’s Fine Gael because they wanted further leaps in EU integration?

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Premier Li Says Downward Pressure Continues For Chinese Economy (Reuters)

China’s Premier Li Keqiang said on Wednesday downward pressure still existed in its economy despite it operating within a reasonable range and some leading indicators demonstrating a positive trend. China’s factory activity hit multi-month highs in June, official and private surveys showed on Monday, reinforcing signs that the world’s second-largest economy is steadying as the government steps up policy support. Li gave no figures or details and few direct quotes in the comments on the Chinese government’s official website, but also addressed the disconnect between government finances and the difficulty of business getting financing. “Our local and central governments have amassed a large amount of funds,” Li said. “Some have been idle for a long time and must be used … to promote economic development and improve people’s lives.”

It has been getting harder and more expensive to finance firms in the real economy, Li said. These costs must be decreased, especially for small and medium enterprises, he added. The government has unveiled a series of modest stimulus measures in recent months to give a lift to economic growth, which dipped to an 18-month low of 7.4% in the first quarter, China’s slowest annual growth since the third quarter of 2012. Such measures have included targeted reserve requirement cuts for some banks to encourage more lending, quicker fiscal disbursements and hastening construction of railways and public housing projects.

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Nice read on China’s history with capitalism.

China In The Golden Age Of Central Bankers – “Whatever It Takes” (Ben Hunt)

Deng Xiaoping and his ally/mentor, Zhou Enlai, are the architects of modern China, of China as a Great Power. For 30 years Zhou tempered the Maoist ideology of permanent revolution, preserving the kernel of a stable army and stable government bureaucracy, setting the stage for a pragmatic successor to Mao. But it was Deng who was able to out-maneuver the Gang of Four and seize control of the Army and the Party after Mao’s death (and Zhou’s) in 1976, replacing that Maoist ideology of permanent revolution with a market-driven ideology of modernization and economic growth. Deng wasn’t interested in political purity, but in economic results. It’s not the color of the cat, as he famously said, but its ability to catch mice. Deng’s political genius – the core attribute that made him such a consummate survivor – was his ability to sell his vision of economic modernization and growth as an end in itself to other political and military leaders. Permanent revolution is … tiring … and doesn’t really pay that well.

Deng offered a vision of stability and wealth, and by 1979 that vision proved to be enormously successful in uniting what Clausewitz called the iron triangle of a Great Power – Army, Government, and People, acting as one for a common goal. Economic growth was, to paraphrase “The Big Lebowski”, the rug that tied the whole room together. Importantly, Deng’s unifying vision of economic growth and modernization was socialist and nationalist in nature, not liberal and individualistic. Deng was no petty oligarch, stashing away billions in foreign bank accounts during his tenure as Paramount Leader, and this was a big part of what made his transformation of the Chinese nation so successful. Deng was authentic. He was a survivor and he was a patriot. He was a Dude, enforcing at the highest levels of the Party and the Army an understanding that economic growth was (primarily) in the service of the nation rather than (primarily) in the service of personal aggrandizement.

Sure, there might be the occasional provincial governor egregiously lining his family’s pockets rather than kicking up to the central authorities in Beijing, but this has only been a problem for the Chinese government for … oh, the past 3,000 years or so, and it’s nothing that a few show trials and public executions can’t bring back in line. No, the important thing was that China’s top political and military leaders shared Deng’s vision of market-oriented AND socialist/nationalist ideologies existing hand-in-hand. And for a while there, they did. Today, however, the Chinese State faces two existential threats, each stemming from or accelerated by the Great Recession and Western policy responses to that crisis of market confidence. First, QE and other “emergency” Western monetary policies of the past five years threaten the grand political unification of Deng Xiaoping from without. Second, massive wealth inequality and concentration driven largely by those same monetary policies threaten it from within.

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This has been looming for a while.

Australian Economic Boom Ending (RT)

A common misconception about lemmings is that they commit collective suicide during migration. Fuelled by a 1958 Disney film called White Wilderness, stage-trickery gave the impression that the rodents jumped to their deaths off cliffs. In reality, the producers (who won an Oscar) launched the helpless creatures off a turntable to their demise in order to fuel a myth and presumably give the audience what they wanted to see. The same principle is frequently applied to economics during boom cycles by local mainstream media in whichever nation the apparent economic growth is taking place. Instead of responsibly using their influence to warn the populace that the prosperity mightn’t be solid, the media generally become the chief cheerleaders for the bubble, serving to inflate the percolation even more.

Frequently, they even try to make the boom look ‘boomier’ by comparing salaries/property-prices in their country to another nation which has historically been wealthier, but is on a more regular and sane economic path at the point in time. There are myriad reasons for this phenomenon. Sometimes, media-proprietors need ‘confidence’ to keep other businesses they may own on a ‘growth path’ and often individual editors, dizzy as their house price keeps rising and creates paper-wealth, block dissent in order to maintain the feel-good factor. There is also the commercial imperative that advertisers may baulk if the media-outlet is considered to be ‘too negative’ and the fact that huge revenue streams can be tapped, particularly by newspapers, during a housing bubble via property advertising.

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BRICS Is Morphing Into An Anti-Dollar Alliance (VOR)

Before the crucial visit to Beijing next week, the governor of the Russian Central Bank, Elvira Nabiullina met Vladimir Putin to report on the progress of the upcoming ruble-yuan swap deal with the People’s Bank of China and Kremlin used the meeting to let the world know about the technical details of its international anti-dollar alliance. On June 10th, Sergey Glaziev, Putin’s economy advisor published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The ultimate goal would be to break the Washington’s money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine.

Glaziev’s critics believe that such an alliance would be difficult to establish and that creating a non-dollar-based global financial system would be extremely challenging from a technical point of view. However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing: We’ve done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing , she said casually and then dropped the bomb: “We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system]”.

It seems that Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this “quasi-IMF system”, the BRICS will use a part (most likely the dollar part ) of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US.

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Sure, energy is Moody’s strong point.

Moody’s Says UK Energy Crunch Will Be Temporary (Guardian)

The wholesale price of electricity should remain flat and could even fall, according to new research from the rating agency Moody’s which will be welcomed by government and consumers. New offshore wind farms, better insulated houses and the possibility of weaker gas prices are likely to combine to help halt what many expected to be a steady rise in retail prices. The ratings agency also believes that a much-feared energy crunch which could take the lights out as soon as this winter or next will be temporary, with capacity margins rising to reach almost 20% by 2020. “We believe that widely expected tightness will be shortlived as energy efficiency gains, the rollout of offshore wind power and the return of mothballed gas plants will keep prices in check”, said Scott Phillips, Moody’s vice president and senior analyst. “Our view is that power prices will stay around current levels, or £48-53 per megawatt hour, through the end of the decade”, he added.

The assessment by Moody’s runs counter to the message put out by the energy sector, which has warned that prices are on an ever rising trajectory made worse by government environmental and social obligations. Moody’s does not look to predict the retail price but says “we do not fully share this view” of the power industry that UK prices will rise sharply due to the retirement of old coal and oil plants, the government’s introduction of a minimum carbon price and increasing commodity costs. “While the reserve margin will likely tighten in 2015, which is positive for prices, we see it widening out again from 2016. Our view reflects a large amount of renewable capacity to be added onto the electricity grid, particularly in offshore wind (reaching 10GW by 2020) and solar photovoltaic (reaching 7GW by 2020).

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US And Germany Want Gas Hub In Ukraine (RT)

German and US companies want to start using Ukraine as a gas hub, according to Aleksandr Todiychuk, Deputy Chairman of the country’s national oil and gas company Naftogaz. “For them [Germany and the US] it’s an opportunity to gain a foothold in the region. Our underground gas storage is interesting for both sellers and buyers of gas. This is why potentially everybody who’s interested in creating a hub, are talking about our high potential in this field,” Todiychuk said in an interview with the Russian daily Kommersant.

Gazprom, the world’s largest producer of natural gas, has stopped using Ukraine as a transit route for gas deliveries, worried the indebted country will start to siphon off deliveries intended for Europe. Because of its $4.5 billion debt, Gazprom switched Ukraine to a prepayment system in June. Europe depends on Russian gas via Ukraine for 15% of its energy needs. Ukraine borders seven European countries – Belarus, Poland, Slovakia, Hungary, Romania, Moldova, and Russia. Its location on the Black Sea also creates a water border with Bulgaria, Turkey, and Georgia. Ukraine will develop a plan to change its underground gas storage system in the fall, which will increase the convenience and flexibility for gas consumers, including a rapid injection feature and gas lift, said Todiychuk.

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Yeah, blow it all over the place. Easier than not polluting in the first place.

Beijing To Build ‘Wind Passage’ To Blow Away Smog (MarketWatch)

To tackle Beijing’s notorious air pollution, characterized by frequent thick smog hanging over the city, local authorities have come up with a possible solution: funneling wind through the streets to blow away the dirty air. The national and municipal governments’ respective weather bureaus are studying the feasibility of creating an “urban wind passage,” a Beijing News report Wednesday quoted a senior Beijing city environmental researcher, Liu Chunlan, as saying. The wind corridor would allow air from the suburbs to blow through the urban center and, hopefully, remove the air pollutants, Liu said.

She said the city government is currently revising its urban planning to include specific details on the wind passage, which could be ready by the end of the year. Specifically, the planning department would control the density and height of buildings to channel air pollutants and urban heat and create room for them to disperse. Beijing may not be the only Chinese city considering this method to attack China’s nationwide air-quality problem. A number of major Chinese cities — including Shanghai, Hangzhou and Nanjing — have thought about the possibility of building such wind passages, Beijing News said.

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Deeply sad.

Indonesia Has World’s Highest Deforestation Rate (MongaBay)

Despite a high-level pledge to combat deforestation and a nationwide moratorium on new logging and plantation concessions, deforestation has continued to rise in Indonesia, according to a new study published in Nature Climate Change. Annual forest loss in the southeast Asian nation is now the highest in the world, exceeding even Brazil. The study, led by researchers at the University of Maryland (UMD), is based on analysis of high resolution satellite data. Unlike previous research, the new paper distinguishes between loss of natural forest – which it calls “primary forest” – and cyclical harvesting of industrial plantations. The study finds that Indonesia lost more than 6 million hectares of natural forest between 2000 and 2012. Worryingly, forest loss is trending upwards in the country despite hundreds of millions of dollars being spent by donors and the government on programs to cut deforestation. Deforestation was highest in 2012, the last year of the study.

Indonesia lost 15.79 million hectares of forest between 2000 and the end of 2012, according to the study. Of that area, 38% or 6.02 million hectares consisted of natural or “primary” forest. “We quantified increasing loss of primary forest during the moratorium, meaning the moratorium has not yet slowed clearing and may in fact have accelerated it,” Belinda Margono of UMD and the Ministry of Forestry told Mongabay.com. “Forest loss in 2012 was higher in Indonesia [840,000 ha] than it was in Brazil [460,000 ha].” The results contrast sharply with the Indonesian government’s claims that deforestation has declined rapidly in recent years. Part of the reason for the discrepancy stems from how Indonesia’s Ministry of Forestry classifies forest cover and loss. The ministry counts industrial plantations as forest cover and only measures loss in areas that are designated as being part of the “forest estate”, which covers more than two-thirds the country’s land mass. Forest clearing that occurs outside the official forest estate is therefore not included in official estimates.

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Jul 022014
 July 2, 2014  Posted by at 4:37 pm Finance Tagged with: , , , ,  3 Responses »

Marion Post Wolcott Main street of old mining town Leadville, Colorado. Sep 1941

Oh yeah, sure, optimism is oozing from every single one of America’s pores. Or so they’ll have you believe. 281,000 new jobs says the ADP report, most since December 2012. Of which small business added 117,000 and medium sized business 115,000. And the media are just besides themselves with joy. Shame that the markets react lukewarm at best. Then again, they do better the worse the news gets, all they reflect anymore these days is the level of distortion and convolution that they obey (or is that the other way around?).

One might be inclined to think US small and medium business owners were so busy hiring those new employees that they had no time to read last month that US GDP plunged that -2.96% in Q1. But maybe that’s not quite true, because three weeks ago, the National Federation of Independent Business issued this news release:

NFIB Optimism Index rose 1.4 points in May to 96.6, the highest reading since September 2007. However, while May is the third up month in a row, the Index is still far below readings that have normally accompanied an expansion and there have been similar gains in the past that haven’t panned out in this recovery period. Five Index components improved, one was unchanged and four fell, although not by much.

“May’s numbers bring the Index to it’s highest level since September 2007. However, the four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components such as expectations about sales and business conditions,” said NFIB chief economist Bill Dunkelberg. “With prices being raised more frequently in response to rising labor and higher energy costs it is clear that small businesses are unwilling to invest in an uncertain future. As long as this is the case the economy will continue to be “bifurcated”, with the small business sector not pulling its historical weight in the GDP numbers.”

‘The entire gain in optimism’ was based on nothing but .. optimism bias. That news release does not make small busniess sound anywhere near as optimistic as today’s news reports. How you get from that to a way above expectations hiring spree is not immediately clear. Isn’t it perhaps true that America is so desperate for that recovery to finally materialize that it’s now damn the truth and the torpedoes time?

Things like this from Bloomberg, written earlier today before the ADP report came out, sound as if they’ve been written solely to create a mood in the country. Some people tell some survey they plan something. Thing is, how do you get from there to journalism?

Americans on the Road Again as Economic Recovery Gains Traction

About 34.8 million people plan to drive 50 miles or more from home during the five days ending July 6, up from 34.1 million last year and the most since 2007, AAA, the biggest U.S. motoring organization, said June 26. The travel recovery is boosting sales for hotels and attractions, a sign that consumer confidence and consumer spending are on the mend, said Mark Zandi, chief economist at Moody’s Analytics. “Stronger business travel and tourism is a very good barometer of the health of the broader economy,” Zandi said. “Spending on travel is more discretionary and expensive. The revival in travel is thus a good sign that the economic recovery is gaining traction.”

What recovery? How is -2.96 Q1 GDP growth a recovery? In what universe? This next one is also from Bloomberg and written before the ADP report came out:

U.S. Companies Show Broad Recovery as Hiring Pace Surges

Industries from construction to autos to oil and gas are increasing jobs as growth accelerates after a harsh winter stunted business. As some sectors, such as floor retail sales, have yet to rebound and wages have been kept in check, the recovery is likely to be a steady climb rather than a boom, according to Jeffrey Joerres, executive chairman of Manpowergroup Inc. Nonfarm payrolls may rise by 215,000 in June, which would mark a fifth straight month of increases topping 200,000, according to the median of 89 economists. That also would be the longest streak of monthly gains since September 1999-January 2000. [..]

The U.S. economy is forecast to accelerate after year-on-year growth slowed to 1.5% in the first quarter when severe snowstorms battered the U.S. and kept customers away from stores, shut factories and gummed up transportation of goods. With consumer spending still tepid, companies aren’t hiring in anticipation demand will rise, as in other recoveries, Joerres said. Instead they are they are expanding when they have orders in hand, he said. “We’re not seeing wage inflation at the rate you would think and we’re not seeing increased hours worked at the rate you would think,” said Joerres, whose firm has more than 400,000 clients worldwide.

What is this, a charm offensive? “Year-on-year growth slowed to 1.5% in the first quarter”? You sure that’s all? We have numbers that say otherwise. Plus, wages are not rising, hours are not increasing, but still ‘U.S. Companies Show Broad Recovery as Hiring Pace Surges’? Got a sneak peek at the ADP numbers perhaps?

I can’t help wondering what a reporter or editor expect from publishing nonsense like this. What use is it exactly to make people feel better about a lousy economy? It only lasts for a day. Factory orders just come in, down 0.5%. Guess they’re going to lay off all those 281,00 new hires again over the summer. The thing for me is, I’m getting so tired of all this empty fluff.

What I would want to see from well-paid journalists at Bloomberg and other main media is research into the effects of QE on the US economy, what the price is the American public has to pay to have stock markets rally to new records, what those markets would look like without QE, what home prices are expected to do without it, what the effects of rising interest rates will be on the man in the street and his home in that same street. And don’t go ask the usual expert suspects at Bloomberg or Reuters, they’re the most biased clowns in the crowd.

We live in the age of triggering responses from people’s unconsciousness, where they are most vulnerable, both individual and collective, almost 100 years after Freud and his nephew Edward Bernays, for very different reasons, figured out how to do that. The best proof we live in that age is probably that we never talk about it.

This means that unless you want to be a clueless victim of advertizing and other, more sinister, sorts of manipulation, you need to be awake and alert. And even then. And what better place to start than to write to your Congressman and to your newspaper and tell them you’re a grown up and you can take quite a bit of truth, and if they don’t stop incessantly bullshitting you, you’re not going to vote for them or buy their paper anymore.

World’s ATM Moves to Frankfurt as Yellen’s Fed Slows Cash (Bloomberg)

As Janet Yellen winds down the Federal Reserve’s money-printing operation, Mario Draghi is boosting Europe’s cash supply. That means the dollars Yellen’s Fed is removing could be compensated for by cheap euros from the European Central Bank. The result may be enough cash sloshing around to underpin this year’s run-up in risk assets even if the Fed begins mulling higher interest rates too, says Marios Maratheftis at Standard Chartered in Dubai. “If any central bank can take over the Fed’s role in terms of its impact on global liquidity, it’s the ECB,” according to a June 30 report by Maratheftis and colleagues David Mann and Italo Lombardi. They reckon the relative importance of the Fed in propelling liquidity worldwide has fallen since April 2013. During the last year it has slowed the bond buying it began in December 2008 as financial panic gripped the world.

Regulators’ more recent demands that banks increase reserves also may mean a higher money supply in the U.S. boosts liquidity less elsewhere too. For every $10 billion increase in the U.S. money supply, there is now a $20.5 billion increase globally, down from $24.4 billion a year ago, according to the Standard Chartered economists. Meantime, for every $10 billion rise in the euro area’s money supply there’s a $19.7 billion boost globally, up from $18 billion. With its quantitative-easing program winding down, the Fed has gone from having 35% more impact than the ECB a year ago to 5% today. The economists also calculate that to keep global money supply stable, the ECB would need to provide $10 billion of liquidity for every $9.5 billion withdrawn by the Fed.

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Global Investors Pare Risky Bond Holdings, Brace For Sell-off (Reuters)

Some of the biggest global investors have started to pull back from riskier fixed-income assets even as the Federal Reserve keeps on a green light for risk. Loomis Sayles, GAM, and Standish are among those who say U.S. investment grade and high yield corporate bond prices have gone too far, making returns less compelling. They’re aiming to get ahead of a market reversal that could be unpleasant once the Fed starts raising interest rates, probably next year. “Valuations are getting stretched,” said Jack Flaherty, investment manager at GAM, part of GAM Holding AG, a publicly-listed Swiss company with more than $120 billion in assets. “You’d rather be early in getting out because when it does turn, it could be more violent than expected.” Bonds had a solid start to 2014, with the Barclays U.S. Aggregate Index returning about 3.8 percent for the first six months of the year. Interest from overseas investors and pensions has kept flows into fixed income funds strong.

That has reduced the extra premium investors are willing to pay to hold these bonds instead of the safer U.S. Treasuries. This premium, or spread, is now at its lowest since 2007, and suggests confidence in the prospects of the U.S. corporation issuing the debt. GAM has pared its U.S. high-yield bond holdings, and plans to cut back more over the next few months. It’s re-allocated to emerging market local debt and convertible bonds – debt that can be converted into shares of stock. Flaherty is concerned that after the Fed raises rates, liquidity could be a big problem because of Wall Street brokerages’ reduced presence in the corporate bond market. in the past, big banks could be counted on to make it easier to buy and sell bonds because of their sizable inventory. But new rules have made it more costly to hold such assets.

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‘ … when one lends him more money in order for him to pay back what he owes, one is not bailing him out but rather pushing him in a bigger hole!’

Credit: The Molotov Cocktail (Macronomics)

When somebody has too much debt and cannot reimburse it, how do you bail him out? Obviously by restructuring his debts, which imply losses for his creditors. But when one lends him more money in order for him to pay back what he owes, one is not bailing him out but rather pushing him in a bigger hole! The game until now has been to “print” more money and to add more debt on the shoulders of the indebted ones, to gain some time in the hope that growth will resume and reduce de facto the weight of the existing debt burden and the additional new debt issued to support the initial debt troubles. This is a big misunderstanding of debt dynamics and its effects on the economy. When debt becomes too big, which it is now the case in many parts of Europe, the servicing drains all the available cash flows and reduces the growth potential. Credit dynamic is based on Growth. No growth or weak growth can lead to defaults and asset deflation. We hate sounding like a broken record but: no credit, no loan growth, no loan growth, no economic growth and no reduction of aforementioned budget deficits and debt levels. [..]

Again we reminded ourselves the wise words of Dr Jochen Felsenheimer: “Banks employ too much debt, because they know that they will ultimately be bailed out. Governments do exactly the same thing. Particularly those in currency unions with explicit – or at least implicit guarantees. It is just such structures that let governments increase their debt at the cost of the community. For example, in order to finance very moderate tax rates for their citizens so as to increase the chance of their own re-election (see Italy). Or to finance low rates of tax for companies and at the same time boost their domestic banking system (see Ireland). Or to raise social security benefits and support infrastructure projects which are intended to benefit the domestic economy (see Greece). Or to boost the property market (Spain and the USA). This results in some people postulating a direct relationship between failure of the market and failure of democracy.”

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I think they already have.

Central Banks Risk Making Global Economy Permanently Unstable: BIS (Telegraph)

Ultra low interest rates and the failure of policy to “lean against” the build-up of financial imbalances are in danger of making the global economy permanently unstable, the Bank for International Settlements has warned. In its annual report, the Swiss-based “bank of central banks” spelled out the risks of relying too heavily on monetary policy to stimulate the economy. The BIS warned that central banks including the Bank of England and US Federal Reserve could keep monetary policy loose for too long, with potentially damaging consequences. “The prospects for a bumpy exit together with other factors suggest that the predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly,” the BIS said on Sunday.

It added that a “persistent easing bias” by fiscal, monetary and prudential policymakers had lulled governments “into a false sense of security” that delayed needed consolidation and created a risk that instability could “entrench itself” in the system. “Policy does not lean against the booms but eases aggressively and persistently during busts,” the BIS said. “This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. “Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent.”

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‘ If the Fed can just create money to increase demand, why bother doing it the hard way? Why do you need to earn money to create demand when you can just create it?’

Don’t Mistake This Sham Boom for the Real Thing (Bonner)

The US economy is 70% consumer spending, reason the geniuses at the Fed. So anything they can do to boost consumer spending will also boost the economy. This sort of simpleminded logic is either breathtakingly naïve or mind-bogglingly stupid. Consumers need to have money to spend before they can spend it. If the economy is working properly, they earn it from honest bussing and schlepping. But suppose the economy is in a funk? Then what are they supposed to do? No problem, say the economists. We’ll just create it. This ersatz money is supposed to stimulate the consumer to spend… whereupon, businesses will spring to life. They’ll offer him a job, boost his wages… and then he’ll have real money to spend! But wait. If the Fed can just create money to increase demand, why bother doing it the hard way? Why do you need to earn money to create demand when you can just create it?

This point has never been clarified. Nor have the feds ever noticed that consumer demand is the result of savings, investment, work, skill… and all the other things that go into producing a real product or service. Consumer demand is not what causes those things to happen. In the abstract, demand is unlimited. But output is not. Nor has it ever been demonstrated that central financial planning works. And as of last week we have more evidence that it doesn’t … What last week’s figures tell us is there is no real recovery. Just a sham boom created by EZ money. We’ve now got two months of figures for the second quarter. They tell us the same thing the first quarter’s numbers told us. Consumers aren’t spending like it was 2007. They’re spending like it was 2009… or 2010… or 2011.

In other words, they’re spending as though they were reasonable people who have realized how the system works. The Fed creates a world where its friends and cronies can borrow at below the rate of consumer price inflation. The 1% gets richer. The other 99% struggles to keep up with the bills. As we have been warning, consumer prices are rising faster than the Fed admits. That leaves the typical household with less money to spend than the numbers suggest. We see the effect of it on consumer spending. The Fed pinched off savings, investment and employment. Now, it gets what you’d expect: low GDP! Six years of “stimulating” the economy by giving it more of what it least needed has produced no real recovery… just more debt. It has also produced a corrupt money system in which almost every race is fixed. The 1% wins every time. The consumer is barely able to limp around the track.

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Fooling All The Experts With Seasonal Adjustments, All Of The Time (Zero Hedge)

Reading the economists’ comments in response to today’s ISM report (which, incidentally, missed expectations) one would think that the US has practically entered a second golden age. Here is a sample:

  • Manufacturing index “has now stabilized at a level reflecting a solid pace of expansion,” Thomas Simons, economist at Jefferies, writes in note
  • June data consistent with Barclays estimate of 2Q GDP growth rate of 4%, according to note from Cooper Howes, economist at firm.
  • June’s reading of 55.3 “has to be viewed as a good result, even if it was lower than expectations,” Rob Carnell, economist at ING, writes in note
  • ISM index shows factories humming along in Q2, according to UBS
  • And especially this one from TD Securities: Increase in new orders, as tracked by ISM factory report, is “especially encouraging as it augurs very well for future manufacturing sector activity”

So what exactly are all these “experts” looking at to be so convinced, once again, that the “imminent” economic surge that thay have all been predicting for so long, incorrectly, is finally here. The answer – the all import New Orders index – the key driver of the headline ISM print and the one most important sub-headline index. And if we were also simply looking at the reported number of 58.9, which printed at the highest level since December, we too would assume that the US economy is finally rebounding. Alas, here lies the rub: what none of the abovementioned experts realize is that for some inexplicable reason, the ISM survey is, just like the vast majority of all other economic indicators, also seasonally adjusted.

Recall that it was ISM’s seasonal adjustment SNAFU last month, when it used the wrong “adjustment factor”, that caused the reported number to become a humiliating farce after the ISM had to revise it not once but twice with what ultimately ended up being a “factor” leading to a far higher, and consensus expectation-beating, headline ISM print of 55.4. But what really happened in June? For the answer we need a refresher of just how the ISM survey results in reported numbers. What the ISM does is ask respondents to comment on how they are seeing any given query category as performing in the current month. The response options are simple: better, same, or worse. The ISM then takes the%age of “better” responses and adds half the%age of “same” (ignoring the worse answers) for any of the following categories:

  • New Orders (58.9 in June)
  • Production (60.0)
  • Employment (52.8)
  • Delivery Time (51.9)
  • Inventories (53.0)

Then it simply takes the equal-weighted average of these 5 series and gets the final number (in the case of June 55.3 down from May’s adjusted 55.4). However, before the final tabulation, the ISM also applies a little-known seasonal adjustment factor to the actual unadjusted survey reponse result before getting a seasonally adjusted number that feeds into the above calculation. Why a survey needs to be seasonally adjusted – considering it merely captures sentiment which already reflects the periodicity of the seasons when it is, well, experienced – is beyond the scope of this article, and/or logic.

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And that’s a big problem when they come invest in you home town. But nobody talks about it.

Quality Of Chinese Data ‘Unknowable’ (CNBC)

Founder of short-seller Muddy Waters Research, Carson Block, claimed on Tuesday that Chinese economic data lacked credibility following the release of China PMI data, which came in at a 6-month high. Block is well-known for issuing damning research and short selling Chinese companies mostly listed in the U.S. and Canada. He became a controversial figure after claiming the firms he was shorting were fraudulent. The companies, meanwhile, have questioned Muddy Waters’ sources. Chinese mobile security software company NQ Mobile, which saw a huge drop in its shares after Block described the firm as a “massive fraud”, has said Block’s firm does not disclose who its researchers are and what documents they examine.

Block said the China was facing a “massive credit and asset bubble” and questioned the legitimacy and quality of Chinese GDP prints. “I think we have to understand (that) what China is printing on GDP is really for political reasons internally. It is unknowable what the quality of the data really is,” Block told CNBC. Block is the not the first voice in the market to question the credibility of Chinese data. China’s official purchasing manager’s index (PMI) for June came in at a six-month high of 51, in line with expectations and up from 50.8 in May.

Global chief economist at Unicredit, Erik Nielsen said the figures were “curious”. “Why is it that the Chinese are having PMIs around 50 and growth at about 6 or 6.5%? It is constructive in every other country for 50 to be above flat,” he said. “It is simply a curious question, if you look through GDP numbers in any other country, you cannot construct any logical explanation for why they have such little volatility in growth in China,” he said. Block argued that a corrupt elite in China controls the banking system. “They control a huge swath of the economy through non-financial state owned enterprises. The core of the economy is subject to this kind of corruption,” he said. Block also questioned the legitimacy of the anti-corruption crackdown launched by President Xi Jinping, adding “things aren’t getting any different”.

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Is Asia The Next Financial Center Of The World? (CNBC)

In 1602 the Dutch East India Company opened the world’s first stock exchange in Amsterdam. The new company was on its way to dominating the lucrative international trade in spices from the Far East, and it needed huge amounts of cash to finance its fleet of merchant ships. Hence, the Amsterdam Bourse, which started life as an open-air market where traders could buy and sell the East India Company’s stocks and bonds. Those traders soon invented the first derivative contracts, simple call and put options that gave them the right to trade shares in the future. Other companies started issuing shares on the Bourse, which moved to a handsome new building in 1611. Rival European capitals launched their own stock exchanges. The securitization of the world was under way.

Today the Amsterdam Bourse is a branch of Euronext, an exchange holding company that also operates the Brussels and Paris exchanges. Euronext, in turn, is owned by Atlanta-based IntercontinentalExchange (ICE), which operates a total of 23 exchanges around the world, including the venerable New York Stock Exchange, which it acquired late last year for $8.2 billion. It’s worth remembering the original Amsterdam Bourse because it established the template for the modern financial center, a physical place where finance professionals help companies access the capital they need to grow.

Location obviously matters somewhat less in an era of exchange consolidation, globalized capital and 24/7 electronic trading. Even so, the complex infrastructure of modern finance is still clustered in a few major cities around the world. “If you have a laptop and a satellite phone, you can trade from on top of a mountain,” said Mark Yeandle, associate director of London’s Z/Yen Group, which produces a biannual ranking of the world’s top financial centers. “And yet people naturally want to cluster in cities near their clients and suppliers, even if they don’t have to.”

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‘ … offering to buy back homes above the purchase price?!’

China Developers Offering Home Buybacks in Weakest Markets (Bloomberg)

Property developers in two of China’s weakest housing markets are offering to buy back homes above the purchase price to boost sales as demand slows. In Hangzhou, where home prices fell the most in May among 70 Chinese cities watched by the government, Shanheng Real Estate Group is giving homebuyers an option to sell back their apartments in five years for 40% above the purchase price. In Wenzhou, DoThink Group is offering to repurchase homes at three of its projects for 120% of the purchase price after three years. The offers are the latest strategy by developers across China, including reducing prices, delaying project launches and offering incentives to potential buyers, as they seek to maintain sales targets. Prices of new homes fell in May from April in half the 70 cities tracked by the government, the largest proportion since May 2012, according to government data.

A more persistent and sharper downturn in the property sector is the biggest risk for China’s economy in the next couple of years, according to UBS AG. “Obviously they’re relatively cash-thirsty,” said Dai Fang, a Shanghai-based analyst at Zheshang Securities Co. “If it works, there surely will be other developers following suit.” China’s home sales slumped 10.2% in the first five months of this year from the same period a year earlier amid tight credit and an economic slowdown, reversing last year’s 27% jump. The average new-home price in 100 cities tracked by SouFun Holdings fell 0.5% in June from the previous month, accelerating from the 0.3% decline in May that ended 23 consecutive months of gains.

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The Communist party as a bunch of desperate sorcerer’s apprentices.

China’s Repression of Savers Eases (Bloomberg)

The extra interest Yin Xuelan earned last year by socking her savings into wealth management products instead of bank deposits paid for a tour of Taiwan and a microwave oven. “I didn’t need to go to Taiwan and I didn’t need to buy a microwave oven, but with this extra money, why not?” said retired schoolteacher Yin, 60, as she put receipts into her pink purse at an Industrial & Commercial Bank of China branch in central Beijing. “It’s like free money.” Yin is a beneficiary of an easing in China’s financial repression, a term that describes the way savers have suffered artificially low returns on deposits in order to provide cheap loans for investment. Measures used for the size of the toll – such as inflation-adjusted deposit rates, the gap between rates on loans and the pace of economic growth – have shifted in favor of savers in the past four years.

The burden has dropped to the equivalent of about 1% of gross domestic product annually from 5% to 8% as recently as three to four years ago, estimates Michael Pettis, a finance professor at Peking University. That’s a shift of as much as 2.6 trillion yuan ($420 billion) to households from borrowers from 2010 to 2013. “It is a turning point,” said Chen Zhiwu, a finance professor at Yale University in New Haven, Connecticut, and a former adviser to China’s State Council. “It will afford more growth opportunities for domestic consumption and the service sector.” Financial repression refers to policies that force savers to accept returns below the rate of inflation and that enable banks to provide cheap loans to companies and governments, reducing the burden of their debt repayments.

A sustained easing would channel more of China’s wealth to the average person while squeezing bank margins and the debt-fueled investment that’s evoked comparisons with the excesses that generated Japan’s lost decades and the Asian financial crisis. On the flip side, slimmer bank profits may add to risks for an industry grappling with the fallout from record lending in the aftermath of the global financial crisis. “Many local governments and state enterprises have made low-return investments based on the low-cost funding,” said David Dollar, a former U.S. Treasury Department official in China who is now a senior fellow at the Brookings Institution in Washington. “As the cost of capital rises, some of them no doubt will have difficulty servicing their debts and may even be pushed into bankruptcy.”

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Record Bond Sales Show China Focused on GDP Growth Over Debt (Bloomberg)

China’s Premier Li Keqiang has promised to cut credit while also meeting a 7.5% economic growth target. Record bond sales last quarter show which pledge he’s prioritizing. Issuance jumped 54% from the previous three months to 1.55 trillion yuan ($250 billion), the most in data compiled by Bloomberg. Yields on two-year AAA rated corporate notes have dropped 137 basis points this year to near a 10-month low of 4.86%, as authorities eased after tightening that had sparked credit crunches in 2013. When Premier Li took office last year he stressed the need for painful reforms to pare the influence of the state, wean industries with overcapacity from debt and ease access to funds for smaller enterprises. The latest filings of more than 4,000 publicly traded non-financial Chinese companies show $2.05 trillion of obligations, up from $1.8 trillion at the end of 2012, with the 10 biggest state-owned borrowers accounting for 18% of the liabilities.

“The government may have sped up the approval of corporate bonds to help stabilize the economy,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities, the nation’s third-biggest brokerage. “The issuance may continue to increase in the third quarter because that’s when rising bond sales help the government’s stimulus measures work.” The Finance Ministry called for faster spending of budgeted funds in May, and the State Council said it would increase support to service industries amid “relatively large” downward economic pressure. That followed steps outlined in April for faster railway spending and tax breaks to help ensure the government meets its economic expansion goal. China’s manufacturing expanded in June at the fastest pace this year, the Purchasing Managers’ Index showed yesterday. While such signals support Premier Li’s contention the nation will meet its 7.5% growth target this year, the government’s efforts to prod expansion have added to concern borrowings may continue to rise.

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‘ … the golden age of China’s economic boom is long past’

China’s Infamous Swag Markets Lose Their Shine (CNBC)

As far as market vendor Chang Yu is concerned the golden age of China’s economic boom is long past. “When I arrived [eight years ago], there were so many people you couldn’t even walk here,” she told CNBC, gesturing toward the empty isle where she sells wigs in Beijing’s YaShow market. Beijing’s markets were once the pride of China where the state-supported manufacturing industry supplied the west with a steady stream of goods and lifted millions of people from poverty. These markets thrived in the late 1990’s and early 2000’s, selling surplus, flawed and copycat items. They were meccas for tourists looking to buy something genuine or close to it for next to nothing. For years, young migrant vendors haggled hard to bring home the bacon.

Now they are in decline. [..] Dozens of vendors in Beijing’s famous markets who once proudly paraded their wares before celebrities and heads of state told CNBC that business has never been worse. As China outgrows low-end manufacturing, property values soar and seasoned consumers seek greater convenience and choices online, these markets must evolve or die. Rising production costs have pushed some foreign companies to move production to less developed Asian countries. Average wages in China’s manufacturing sector have risen 96% since 2007, according to Thomas Orlik, an economist at Bloomberg Financial and author of Understanding China’s Economic Indicators. “Manufacturers are facing rising costs for labor, rent and electricity and they have passed some of those on to shopkeepers,” Orlik said.

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You have to wonder when France can expect the first real attacks from the markets.

Europe’s ‘Sick Man’ Fights Housing Crisis (CNBC)

France has in recent weeks unveiled a slew of measures to boost its ailing construction sector and revive growth for the euro zone’s “sick man”, but analysts warn the measures will fall short. The country’s construction sector is currently going through a deep crisis as new building reaches historically low levels. The latest official figures reveal that new housing starts in the twelve months to May were at the weakest level since 1998. It comes as growth in the euro zone’s second-largest economy stalls and France is labeled the “sick man of Europe”. Some 8.5% of the country’s jobs come from the construction sector. The decline in the sector – activity fell 1.4% in the first quarter, well below overall economic output – is expected to continue for the third consecutive year.[..]

Last week, the government unveiled its latest action plan to stimulate the sector with an extension to interest free loans which had been set to be scrapped by the end of 2014. The “0% interest loan”, introduced in 2011, was meant to help middle and low-income first-time buyers by offering them cheap financing. The repayments could be deferred for five years. That figure has now been raised to seven years. Initially restricted to new-build homes, their use has now been extended to old properties in need of renovation in certain areas and access to the loans has been increased. The government believes that the number of beneficiaries will be increased by 60% a year from 40,000 currently to 70,000. But analysts doubt the measures will have much of an impact, given the value of the loans available is fairly modest, especially if you want to buy in Paris, where prices are the highest in the country.

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Biggest Pension Fund Replaces Bank Of Japan Driving Stock Rally (Bloomberg)

Move over, Haruhiko Kuroda. Stock investors, tired of waiting for a boost from the Japanese central bank, have found a new hero in the nation’s 128.6 trillion yen ($1.3 trillion) retirement fund, said Societe Generale Securities. The Topix index rebounded 5% last quarter as the Government Pension Investment Fund moved closer to an asset overhaul that’s expected to pour 3.6 trillion yen into Japan’s equities. The gauge started the year with the developed world’s steepest quarterly slump as the yen gained and Kuroda dashed expectations for more stimulus. “The BOJ’s role is over and the market is now counting on GPIF,” said Akihiro Ohara, head of Japan sales trading at Societe Generale. “I expect the fund to change its asset allocation around September.”

“Economic data and company outlooks suggest Japan is overcoming the tax hike,” Kazuhiro Miyake, chief strategist at Daiwa Institute of Research in Tokyo, said by phone on June 27. “Public pension funds will boost their equity weighting in stages and that will improve supply and demand conditions for the market.” The world’s biggest pension fund may change its strategy as soon as August, Yasuhiro Yonezawa, who heads GPIF’s investment committee, told the Nikkei newspaper last month. It will increase its target for holdings of domestic shares to 20% from 12%, while cutting local bonds to 40% from 60%, according to the median estimates in a Bloomberg survey of analysts and investors in May.

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Great idea. Squeeze the young!

US Student Loan Interest Rates Just Went Up 20% (BW)

July is here, which brings an important development to student borrowers: Higher interest rates for education loans kick in today. Loans for undergraduates will increase to 4.66%, from 3.86%, for all new borrowing during the 2014-15 school year. (Loans that students already took out aren’t affected by the hike.) Historically, Congress set a fixed rate for students loans. It was lowered to 3.4% during the financial crisis. Last summer, that temporary reduction was set to expire, which would have caused the rates to double to 6.8%. A last-minute deal pegged the rates to the government’s borrowing costs, which are at historic lows. The roughly seven out of 10 college seniors who borrow to attend school graduate with about $29,400 in loans on average. If the 2014-15 rate increase were applied to the full debt, the average monthly payment would go up about $10 a month—an amount that won’t make or break many borrowers. Over 10 years, the increase could add about $1,350 in interest expenses.

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While recalls continue to rise.

US Auto Sales Close To Hitting The Brakes (CNBC)

America’s auto industry, in the midst of a five-year run where sales have rebounded more than 55%, is close to seeing a slowdown according to a new study. The AlixPartners 2014 Automotive Study suggests sales of cars and trucks in the U.S. will hit a peak this year and then gradually pull back. “This is a cyclical industry and we think this current cycle has just about run its course,” said Mark Wakefield of AlixPartners. “We’re a little less optimistic than others about the demand for new vehicles staying this strong.” For 2015, AlixPartners estimates U.S. sales will peak at 16.7 million before gradually starting to pull back. A primary reason new vehicle sales are poised to slow down, according to the new study, is the expectation of rising interest rates. “We’re living in an unusually calm world for interest rates,” said Wakefield. “We believe the Fed will start to raise rates and when that happens, interest rates for auto loans will also go up.”

As a result, Wakefield believes the purchasing power for potential car and truck buyers will diminish. He calculates a 3% rise in interest rates will reduce purchasing power by $2,500 while a jump of 7% would cut into consumer’s purchasing power by $5,250. “The threat of higher rates is a very real one and if they go up it will impact auto sales,” said Wakefield. The latest study by AlixPartners highlights two trends that will alter how many see the auto industry. In the U.S., car sharing is a fast-growing trend that has many potential buyers now opting to car share instead. By the end of the decade, an estimated 4 million people will participate in car-sharing programs, up from 1.3 million this year. Meanwhile, the growth of auto sales in China will be slowing down throughout the rest of this decade. “China is still the growth engine for the auto industry, but its growth is slowing,” said Wakefield.

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Good. Ban. But they’ll come after you for the rest of your – public – life.

NY Towns Have Authority To Ban Gas Drilling, Fracking (Reuters)

New York state’s top court ruled on Monday that towns have the authority to ban gas drilling within their borders, giving a boost to opponents of the drilling method known as fracking. The Court of Appeals in a 5-2 decision upheld drilling bans in the Ithaca suburb of Dryden and in Middlefield, near Cooperstown, saying the laws were extensions of the towns’ zoning authority. Drilling company Norse Energy USA and an upstate dairy farmer separately sued the towns, claiming the bans violated a law designed to create uniform statewide regulations on the oil and gas industry. The court disagreed, saying the law was designed to bar only local ordinances that could impede the state’s ability to regulate drilling activities. “Plainly, the zoning laws in these cases are directed at regulating land use generally and do not attempt to govern the details, procedures or operations of the oil and gas industries,” Judge Victoria Graffeo wrote for the court.

The decision affirmed rulings by three lower courts. The plaintiffs had told the court that upholding the bans would make drilling companies reluctant to invest in the state, since they would be faced with a patchwork of local laws that could change. In 2011, Dryden and Middlefield were among the first of more than 170 municipalities in New York to ban gas drilling as state officials considered whether to lift a moratorium on fracking, which is still in place. Fracking involves blasting chemical-laced water and sand deep below ground to release oil and natural gas trapped within rock formations. It has allowed companies to tap a wealth of new natural gas reserves in other states, but critics say the procedure has polluted water and air, and caused seismic activity near wells.

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Let’s see … How about you stop feeding antibiotics to farm and feedlot animals?!

Superbugs ‘Could Send UK Back To The Dark Ages’ (Daily Mail)

David Cameron has vowed Britain will lead a global fightback against antibiotic-resistant superbugs. The Prime Minister said concerted action was needed to prevent the world from being ‘cast back into the dark ages of medicine’. The rise of untreatable bacteria is one of the biggest health threats facing the world, threatening an ‘unthinkable scenario’ where minor infections could once again kill. Tens of thousands of people are already dying of infections that have evolved resistance to common treatments. The World Health Organisation has warned that routine operations and minor scratches could become fatal if nothing is done. Mr Cameron said: ‘For many of us, we only know a world where infections or sicknesses can be quickly remedied by a visit to the doctor and a course of antibiotics.

‘This great British discovery has kept our families safe for decades, while saving billions of lives around the world. ‘But that protection is at risk as never before. ‘Resistance to antibiotics is now a very real and worrying threat, as bacteria mutates to become immune to its effect.’ He warned 25,000 people in Europe already die every year from infections resistant to anti-biotic drugs. ‘This is not some distant threat but something happening right now’, he added. ‘If we fail to act, we are looking at an almost unthinkable scenario where antibiotics no longer work and we are cast back into the dark ages of medicine where treatable infections and injuries will kill once again. ‘That simply cannot be allowed to happened and I want to see a stronger, more coherent global response, with nations, business and the world of science working together to up our game in the field of antibiotics.

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This means it’s now part of the ecosystem, just not in animals’ stomachs anymore, but in their veins. That can’t be good.

Plastic Garbage On Ocean Surface Is Mysteriously Disappearing (LiveScience)

A vast amount of the plastic garbage littering the surface of the ocean may be disappearing, a new study suggests. Exactly what is happening to this ocean debris is a mystery, though the researchers hypothesize that the trash could be breaking down into tiny, undetectable pieces. Alternatively, the garbage may be traveling deep into the ocean’s interior. “The deep ocean is a great unknown,” study co-author Andrés Cózar, an ecologist at the University of Cadiz in Spain, said in an email. “Sadly, the accumulation of plastic in the deep ocean would be modifying this mysterious ecosystem – the largest of the world – before we can know it.” Researchers drew their conclusion about the disappearing trash by analyzing the amount of plastic debris floating in the ocean, as well as global plastic production and disposal rates.

The modern period has been dubbed the Plastic Age. As society produces more and more of the material, storm water runoff carries more and more of the detritus of modern life into the ocean. Ocean currents, acting as giant conveyer belts, then carry the plastic into several subtropical regions, such as the infamous Pacific Ocean Garbage Patch. In the 1970s, the National Academy of Sciences estimated that about 45,000 tons of plastic reaches the oceans every year. Since then, the world’s production of plastic has quintupled. Cózar and his colleagues wanted to understand the size and extent of the ocean’s garbage problem. The researchers circumnavigated the globe in a ship called the Malaspina in 2010, collecting surface water samples and measuring plastic concentrations. The team also analyzed data from several other expeditions, looking at a total of 3,070 samples.

What they found was strange. Despite the drastic increase in plastic produced since the 1970s, the researchers estimated there were between 7,000 and 35,000 tons of plastic in the oceans. Based on crude calculations, there should have been millions of tons of garbage in the oceans. Because each large piece of plastic can break down into many additional, smaller pieces of plastic, the researchers expected to find more tiny pieces of debris. But the vast majority of the small plastic pieces, measuring less than 0.2 inches (5 millimeters) in size, were missing, Cózar said.

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Caribbean Coral Reefs ‘Will Be Lost Within 20 Years’ (Guardian)

Most Caribbean coral reefs will disappear within the next 20 years, primarily due to the decline of grazers such as sea urchins and parrotfish, a new report has warned. A comprehensive analysis by 90 experts of more than 35,000 surveys conducted at nearly 100 Caribbean locations since 1970 shows that the region’s corals have declined by more than 50%. But restoring key fish populations and improving protection from overfishing and pollution could help the reefs recover and make them more resilient to the impacts of climate change, according to the study from the Global Coral Reef Monitoring Network, the International Union for Conservation of Nature and the United Nations Environment Programme. While climate change and the resulting ocean acidification and coral bleaching does pose a major threat to the region, the report – Status and Trends of Caribbean Coral Reefs: 1970-2012 – found that local pressures such as tourism, overfishing and pollution posed the biggest problems.

And these factors have made the loss of the two main grazer species, the parrotfish and sea urchin, the key driver of coral decline in the Caribbean. Grazers are important fish in the marine ecosystem as they eat the algae that can smother corals. An unidentified disease led to a mass mortality of the sea urchin in 1983 and overfishing throughout the 20th century has brought the parrotfish population to the brink of extinction in some regions, according to the report. Reefs where parrotfish are not protected have suffered significant declines, including Jamaica, the entire Florida reef tract from Miami to Key West, and the US Virgin Islands. At the same time, the report showed that some of the healthiest Caribbean coral reefs are those that are home to big populations of grazing parrotfish. These include the US Flower Garden Banks national marine sanctuary in the northern Gulf of Mexico, Bermuda and Bonaire – all of which have restricted or banned fishing practices that harm parrotfish.